When you're ready to finance your new home, you have more options than you probably…
Are you looking for a new home but your financial situation doesn’t fit into the neat little banker boxes available from traditional mortgage lenders? Maybe you’re a seller who’s motivated to distinguish your home from all the others in order to close on it faster? The benefits of seller financing can be attractive to buyers and sellers alike, and there’s no better time like now to consider all the options.
Seller financing is currently an uncommon practice but can be a very useful tool for both parties, especially in tight real estate markets. Sellers who are willing to consider financing represent a very small percentage of all homes sold, typically less than 10%. This leaves a big field open to creative buyers and sellers who can work together for great mutual benefit.
A buyer might consider seller-financing if:
- They have less than perfect credit
- They have an unpredictable salary or an unstable work history
- They want a shorter loan term or a faster closing
- They want lower closing costs and flexible down payments and monthly payments
Sellers may want to market financing to buyers for:
- A fast closing process
- Fast cash
- Higher selling price for your home
- Tax Savings
- Attract motivated buyers
- Higher interest rate
- Monthly income
There are many options available for seller financing:
Once quite popular in the ’70s and ’80s, land contracts are starting to make a comeback, and with good reason. If marketed correctly, the seller can create a large pool of buyers and by doing so, can sell the property more quickly. Without a typical lender involved, the loan application process will not hold up the sale. Higher selling prices are also motivation to consider financing your buyer, as well as higher interest rates. A down payment, monthly payments, and a balloon payment at the end of the contract are also attractive options to many sellers.
For the buyer, no mortgage qualification means that folks with imperfect credit, or those with unpredictable income, such as a salesperson, are still able to get into their own home. Buyers don’t receive the deed to the home until they’ve paid for it in full. They earn equity in the home via an equitable title that entitles them to the equity built in the home while it was under contract. Paying on a home under a land contract helps to improve your credit and help you to qualify for a mortgage at the end of the contract.
All-Inclusive Trust Deeds
Also known as wraparound mortgages, this type of seller financing consolidates one or more mortgages into one document and preserves the security interests of each lender. Instead of taking out a loan for the entire price of the home, the buyer obtains a loan for the difference in the sale price and the remaining balance on the seller’s loan. The buyer also takes over mortgage payments. The benefit to the buyer is a smaller loan amount and taking over the seller’s loan could mean a smaller interest rate. Perks for the seller are making the home available to more buyers and selling it at a higher price.
This type of loan is conventionally known as a second mortgage. A junior loan can help a seller who is unable to qualify for a loan for the full value of the home. It can be used for a down payment or to make up the full selling price. This type of loan is a useful tool for both parties. In tight markets, a seller may make this option available to close on the house quickly. Buyers benefit by not immediately having to furnish the full selling price of the home, possibly buying time for credit improvement.
With the lender’s approval, the buyer can take the seller’s place on some types of mortgages. One big advantage to the seller is equity earned has to be paid upfront at the time the loan is assumed. An assumable loan may be an enticing perk to a buyer, allowing the seller to request more for the home. Buyers can avoid qualifying for new loans in some cases, and also eliminate closing costs.
There are many other options available for seller financing. Professional help is advised in all circumstances, on both sides of the sale, to protect all parties. Real estate agents and brokers, and attorneys should be consulted to help create legal documents and satisfy state and local regulations.
Tips For Success
- Sellers should insist on a loan application. Thoroughly verify all information provided. Credit checks, employment checks, reference checks, and review of required financial documents and assets should be done personally by the seller or someone who is working on behalf of the seller.
- Sellers should require that they are allowed to make all final credit-worthy determinations before the written sales contract is approved.
- Any loans made should be secured by the home in order to protect the seller in the case of foreclosure.
- Sellers should request a down payment. It gives them a cushion in case of a foreclosure, and it also makes the buyer a vested party with a stake in the property.
- All parties should negotiate for their best terms. Review local interest rates and terms and consider all options when writing up the contract.
- There are no points to be paid in a seller-financed transaction
- Consider hiring a servicing company to help with the paperwork burden and to draw up the mortgage and other legal papers.
The Bottom Line
You can talk to your real estate agent or check out Craig’s List or other ads to find listings. If you find a home you like but it’s not listed as seller-financed, ask! Many homeowners and also many realtors are not well-versed in seller financing, so do some research. Come prepared and be ready to help educate everyone.