Seller-carried real estate loans (also known as "seller carry-backs") are real estate loans that have been created privately between a buyer and a seller of real estate. In these instances, the seller typically owns the subject real property free of debt and offers it for sale with seller financing. Under these arrangements, the seller serves as the lender to the buyer pursuant to a privately financed transaction that occurs absent the participation of a "conventional" lender (such as a bank). Following the closing, the seller appears of record as the lender and the mortgage he holds against the subject real property is commonly known as a "seller-carried" real estate loan.
 
Seller-carried real estate loans are identical in all material respects to conventional real estate loans with regard to their validity and enforceability as mortgages secured by real estate. However, they differ from conventional real estate loans in several notable respects.
 
First, seller-carried real estate loans represent a small percentage of the outstanding mortgage population. Meridian estimates that seller-carried real estate loans account for less than 1.00% of all outstanding mortgages secured by real estate.
 
Second, there is no federally subsidized or federally guaranteed secondary market for seller-carried real estate loans. Conventional real estate loans enjoy the financial support of three U.S. government-chartered mortgage agencies, FNMA (or "Fannie Mae"), FHLMC (or "Freddie Mac"), and GNMA (or "Ginnie Mae"). These three quasi-governmental agencies form the foundation upon which nearly the entire mortgage-backed securities (MBS) market is based. The constituencies they serve and the nature of their governmental sponsorship may differ somewhat, but the end result is the same: by issuing securities with the implicit (Fannie Mae and Freddie Mac) or explicit (Ginnie Mae) guarantee of the federal government, these agencies promote the availability of low cost mortgage funding by creating a reliable "secondary market" for conventional real estate loans. No such government-sponsored market exists for seller-carried real estate loans.
 
Third, and perhaps surprisingly, seller-carried real estate loans aretypically better quality loans than conventional real estate loans. It is widely acknowledged that the "loan-to-value" ratio is the single most important indicator of a loan's likelihood of default, and seller-carried real estate loans are generally written at lower "loan-to-value" ratios than conventional real estate loans (that is, private lenders typically require larger down payments than conventional lenders). In addition, seller-carried real estate loans are typically smaller balance loans secured by modestly priced homes. These modestly priced homes are generally located in small to medium sized towns and cities, where housing is relatively affordable and where housing costs represent a smaller percentage of an average borrower's income. Modestly priced homes cater to a broad audience, including borrowers who will elect to "trade down" in a slumbering economy. As such, these types of homes have proven themselves to be the least vulnerable to price volatilities brought on by a difficult economy and/or decreasing real estate values.