Mortgages

• Unless a buyer is planning an all-cash transaction, some type of financing is needed to purchase a commercial property. National banks and conventional lenders originate many commercial loans. Unlike residential mortgages, the commercial lender is concerned less with a borrower's credit score and more with determining if the cash flow generated by the investment is sufficient to cover the monthly mortgage payment.
  
  

Down Payment

• Commercial loans are risky and companies go out of business every day. Lenders want to limit the bank's exposure and, as a result, usually require a 20 to 40 percent down payment on the loan. Because many commercial properties are quite expensive, this down payment represents a significant amount of money. If an investor doesn't have sufficient funds, additional capital is needed.
  
  

Seller Financing

• A seller carry back is a second mortgage financed by the seller. Most commercial lenders want the borrower to personally provide at least 10 percent of the purchase price. So, if a lender will fund 70 percent, and the borrower contributes 10 percent, that leaves 20 percent available for seller financing. This loan can be of any type and term, and the primary lender may want to review the documents. The seller will record the private mortgage or deed of trust as a junior lien.
  
  

Foreclosure

• The seller carry back is in a subordinate position to the primary lender's lien. Either one of them can foreclose on the borrower for defaulting on the mortgage, but the primary lender is in a more favorable position. The proceeds of a foreclosure sale pay off the liens by order of priority. The primary lender lien is recorded before the second, and will be paid off before the seller's loan. If there is not enough money left to cover the second mortgage, then the seller takes a loss.