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Loan fall short? Seller might help

When most home buyers go looking for a loan, they visit the usual places: banks, savings and loans, mortgage-brokerage firms and the like, but sometimes their best source of financing is right under their nose _ the seller.

Seller financing typically involves the use of a second mortgage, usually called a seller "take-back" or "carry-back."

A typical seller-financing deal might work like this:

Buyer Baker wants to purchase a $150,000 house with a 10 percent down payment of $15,000, but the bank will lend only $125,000 at 10 percent interest, which would leave him $10,000 short.

To close the deal, Seller Smith could agree to take back a $10,000 second mortgage at 12 percent annually, with interest-only payments due each month and a lump sum "balloon" payment of $10,000 due and payable in seven years.

Buyer Baker would make a payment of about $1,097 to the bank each month for his first loan. He also would write a second check to Smith for $100, representing interest on the second mortgage.

Baker would have seven years to come up with the $10,000 or eventually could refinance to pay Smith off. The arrangement helps Baker because he gets to buy a house even though the bank wouldn't finance the entire purchase.

Smith, meantime, earns $100 a month in interest _ much more than if he put $10,000 into a savings account _ and has the security of knowing that he can foreclose and get the home back if Baker doesn't repay all the money.

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