Seller financing (aka owner financing) might be a good deal both for sellers and buyers. Seller financing is when the seller gives the buyer a mortgage. Still, this is rare in real estate. There are several reasons for owner financing to be uncommon. One of the most important issues is that a seller is afraid to become a lender, as it might be risky. Also, many sellers need the whole proceeds to buy their next home. However, the main reason is that most sellers and many realtors are not familiar with it. Seller financing has advantages and disadvantages for both buyers and sellers. Buyer may benefit from dramatically lower closing costs as well as its fast process. Besides, the down payment can be flexible. But here you might guess that buyers will have to pay a higher interest rate than if they get a mortgage in the bank. Sure, for a seller financing a buyer will not have to get pre-approved and approved for a mortgage. Still, the buyer will have to prove to the seller, that he or she is a worthy borrower. If you are a buyer with seller financing, make sure to check the home condition and that the seller owns the home free and clear. Because seller financing is uncommon, buyer and seller would be wise to consult legal and financial experts to understand each and every detail in this transaction. So, if you want to cut the third party – the bank and/or the mortgage lenders, you should keep in mind that there are many risks involved.
There are several types of seller financing, and we’ll focus on each of them in this article. Here we go:
All-inclusive mortgage: Here we have a seller, who carries the promissory note and mortgage for the entire balance of the house price. Note, that it is less than any down payment.
Land contract: When a buyer has a land contract, he or she makes payments to the seller and gets the deed only after the final payment.
Junior mortgage: Junior mortgage is something like a second mortgage. This is a more risky type of seller financing. So, the seller carries a second mortgage for the balance of the purchase price. The risk is that the seller accepts a lower priority than the borrower. In case of a foreclosure, the seller’s junior mortgage is paid after the first mortgage lender is paid off. Besides, there is another “problem”- the bank may not agree to give a loan to someone who has so many debts.
Lease option: Here we have a more spread type and many variations of lease options. The seller leases the home to the buyer, like a simple rental and agrees to sell the property to the buyer after a specific period of time. The seller may credit some part of rental payments against the purchase price.
Assumable mortgage: We have a more detailed article on this. Let’s just mention, that some FHA, VA loans and ARM loans are assumable.
Read more: Types Of Mortgages
Well, here are some of the pros and cons of seller financing from sellers:
Owner financing is great if your home is on the market for a long time. If you can’t sell your home, just add seller financing available in your listing. It will help you find your dream buyer easier and faster.
Traditional lenders often require major repairs and remodel. Still, with seller financing, you can sell your home as is. This is another plus if you don’t want to spend money on renovations and/or don’t have enough time for it.
As a seller, you’ll get a better rate than if you could get from other investments.
We mentioned above, that seller financing is risky. But there is good news for you! If the buyer is not able to make payments any longer, you may get back your home and sell it to someone else, keeping the down payment and all other payments the buyer has made.
If you want to sell your home with seller financing, you have to own the home free and clear. Otherwise, you must get approved from your lender to be able to start the transaction.
Taxes for seller’s financing are too complicated.
After all this information, if you still want to go forward with the deal, keep in mind some useful and easy tips:
Whether you are a buyer or a seller, you should work with a real estate agent and a real estate attorney. They are professional and have knowledge and experience to do whole paperwork for you.
If you are a seller, make sure to run a credit check and be sure the references are OK.
If you are a buyer with poor credit, you should focus on improving your credit score and be able to refinance, before the balloon payment is due, if there is a balloon mortgage.
Note: Seller financing can be complex and detailed. There are many points to cover and this article touched only some of the points.
By: Hermine Aslanyan
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