Since a home is one of the largest investments a person makes, over the years, sellers and lenders have devised several ways to assist a buyer in financing the purchase. It’s common for buyers to apply for some sort of residential mortgage to fund their purchase, but there are times when it isn’t possible for a buyer to secure a traditional mortgage. That’s where Seller Financing steps in.
Seller financing is a financing option offered by sellers that allows the buyer to purchase the property directly from the homeowner. To be clear, the seller doesn’t hand over money to the buyer, like what a bank, or mortgage company does. Instead, they extend enough credit to the buyer to cover the purchase price of their property (less any down payment) and the buyer makes regular payments until the amount is paid in full.
To discuss this in detail, let’s take a look at some of the mechanics of seller financing.
In Seller Financing, the seller functions as the lender in the sales transaction. Both parties sign a promissory note containing the terms of the loan. A mortgage or deed of trust is also drafted with the property description. Over time, the buyer pays back the loan plus interest.
In order to avoid confusion, this is NOT similar to a rent-to-own agreement. In a seller financing deal, the deed is transferred to the buyer as soon as the contract is agreed upon. This makes them responsible for paying the remainder of the loan to the seller. A rent-to-own deal merely gives the option for the buyer to purchase the home at a certain date. The homeowner is still the legal owner of the property, until the buyer (or tenant) decides to finally purchase the property.
Seller financing loans are usually short term. This means that instead of a duration of 15-30 years, as a traditional mortgage, seller financing loans are usually 5 years duration, with a balloon payment at the end. The buyer will make monthly payments for 5 years. At the end of the 5 years, the balance would be due. The idea, is that the property has gained enough value within a few years, and the buyer is in a better financial position to refinance through a traditional bank, or mortgage company. This will allow them to pay off the Seller financed loan.
TYPES OF OWNER FINANCING
The buyer is given an equitable title of the property, meaning they temporarily own it, as long as they are making the payments. There is usually a downpayment, and monthly payments. By making regular monthly payments to the seller, the buyer obtains the deed after the final payment.
The seller leases their home to the buyer for a certain time, with an option to purchase the house. With specific terms and conditions, the homeowner agrees to sell the property (with upfront fees) at a specified time in the future.
This allows the buyer to take the seller’s role on the existing mortgage. FHA, VA, and Conventional Adjustable Rate Mortgage (ARM) loans can be assumable as long as it’s approved by the bank or lender. The Buyer will need to qualify to take over the Seller mortgage obligation.
ADVANTAGES of SELLER FINANCING
As a seller, owner financing can provide benefits in a real estate transaction. This gives you the ability to sell your home as is, meaning you don’t have to worry about making costly repairs that most traditional lenders will require, or worry about an appraisal coming back low. It also allows you to sell to a potential buyer, who cannot qualify for a traditional mortgage. This may help if you are having trouble selling your house.
You also get to sell the property and close the deal faster since both you and the buyer skip the mortgage process. In case the buyer defaults on their regular monthly payments, you get to keep the down payment, including any monthly payments made, and you still own the house.
The advantage for a Buyer, is having an alternative manner of securing financing the purchase, they do not qualify for traditional financing.
DISADVANTAGES of SELLER FINANCING
The buyer may default at any time, but choose not to leave the house. You may need to file for eviction, foreclosure, or other legal action to have the “buyer” removed. If you don’t take back the property, you also end up paying for repairs and maintenance depending on how well the buyer took care of the property.
The rules were basically changed thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act. This Act was formed in response to the 2008 financial crisis, and contains numerous provisions targeting the government sectors who were believed to be responsible for the crisis. These sectors included banks, mortgage lenders, and credit rating agencies.
From an owner financing perspective, the Act states that balloon payments may not be an option anymore and you might have to involve a mortgage loan originator (third party institution or individual that works to complete the loan transaction). It all depends on the number of properties you provide seller financing.
Depending on your financial situation, owner financing can be a good option. If you’re considering selling your home via owner financing, it helps to consult real estate professionals to ensure you are making the right decisions.
Our team of experts here at SellUsHomes have a broad knowledge of different financing options that sellers can take advantage of. After all, all of us are looking for a fast and seamless transaction – and SellUsHomes is here to provide that. To learn more, contact us at (734) 224-5947 or reach out to us via email at email@example.com.