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Fast-paced market changes are forcing sub-prime lenders to "evolve" their mortgage guidelines.

This could be the end of a number of sub-prime mortgage programs that help buyers with little or no downpayment dollars:

• 100% financing for borrowers of dubious credit score, income, or asset reserves
• 103% financing with interest only payment options
• 125% financing

But this doesn't mean that "no downpayment loans" are gone.

If a mortgage lender will only lend a buyer 90 percent of a home's purchase price, for example, there is no reason why the seller himself can't provide the last 10%.  In this sense, the seller is acting as a lender -- putting a lien on the property in exchange for a mortgage, and then collecting interest every month.

This semi-common practice and is known by several names, including:

• Seller Carryback Mortgage
• Seller Second Mortgage
• Seller Mortgage Financing

Seller carrybacks work in the current real estate market because sub-prime lenders now require higher credit scores for 100% financing, and are offering mortgage rates as high as 13% on second liens.

Many home buyers that qualified for no downpayment programs in the past are no longer eligible.

By contrast, a seller carryback doesn't have to meet a sub-prime lender's standards -- it only has to meet the standards of the seller.  And because the seller is the issuer of the mortgage, the terms can be arbitrary. 

Now, that said.  Let's not forget that seller carrybacks are not a risk-free proposition for the homeseller.  If the buyer defaults on his mortgage, the mortgage "investment" could lose all of its value.

Issuing a second mortgage means that you will be second in line to be paid in the event of a foreclosure sale.  Sales like that generally happen at a stiff discount to the home's true value.  From the sale proceeds, all lien holders get paid in the order of their liens. 

So, if there's no money left for second mortgage holder after the first lien holder is paid, the second lien holder gets nothing.

This is why second mortgages often carry higher interest rates than so first mortgages -- they're more risky.  A seller should carefully evaluate a buyer's credit, income and assets before agreeing to a seller carryback.

If the risk is acceptable, though, seller carrybacks can be a terrific way to earn interest income.  The key is keep the rate below what the sub-prime lenders are offering, but not too low as to ignore the risk in lending.

As sub-prime lenders get tighter with their money, it doesn't mean that 100% financing will be unavailable -- it just means that buyers and sellers may want to work out their own arrangements.

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Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.