I am working with a buyer trying to purchase a $10 million house.
He is putting 10% down, he has been prequalified to purchase by a lender, and we made an offer on the house. He is asking the seller to hold a 2nd mortgage in the amount of $3.5 million with a 1 year balloon.
The seller is willing to do it, however he wants some sort of protection just in case the buyer cannot make the balloon payment in the year.
Is there some sort of insurance that can be purchased that would protect the seller in case the buyer defaults on the seller held 2nd?
Thank you for your excellent question. Unfortunately, I’m not aware of any insurance product that would protect the seller in your situation. While mortgage insurance (PMI) is something that buyers can purchase in case they can’t pay their mortgage, this is only for conventional loans and wouldn’t really help with a balloon payment.
One thing that your seller (the would-be 2nd mortgage-holder) might consider would be selling their loan. There are a number of platforms available and investors out there who will buy notes & mortgages in the secondary market. This typically occurs at a discount (the size of the discount is based on the riskiness of the transaction and the creditworthiness of the borrower) but that would allow your seller to effectively exit the transaction and eliminate all of their risk if the buyer doesn’t make the balloon payment.
Hope this helps. You seem fairly well-versed in the process but if you’d like more information on how seller financing works you can check out our ultimate guide here: https://fitsmallbusiness.com/seller-financing/