Everything You Need to Know About Seller-Financed Real Estate DealsSeptember 07, 2017
When it comes to buying a home, it is not always easy to get a mortgage. If you are self-employed or have interruptions in your job history, your bank may not want to give you a mortgage. Sellers want to find a home buyer, but this is not possible if the buyer cannot get a loan. Whether you are buying or selling a house, seller-financed real estate deals can help.
The Basics of Seller Financing
Instead of using a traditional bank, the seller can loan the buyer the purchase amount. Basically, both parties create a promissory note that shows the repayment schedule and interest rate. It details the consequence of defaulting on the loan. Then, the buyer gives a monthly mortgage payment to the seller. This payment includes loan interest, and the interest is often higher than a normal mortgage loan.
These types of arrangements are generally just for the short term. Unlike mortgages, they last for around five years and include a balloon payment at the end. The buyer's goal is to refinance or save enough for the balloon payment before the end of the loan. In the interim, the seller can also sell the loan to someone else. If this happens, then the buyer sends the mortgage payment to the new loan holder.
Seller financing happens in marketplaces where mortgages are harder to find. This happens in two situations. If credit is tight, then home sellers find it difficult to sell without alternative financing. In other areas, mortgages are easy to obtain. The buyer is just unable to get one, so the seller has to offer a loan to get a qualified buyer.
What Is the Point of Seller Financing?
Sellers offer alternative financing for a variety of reasons. They may want to make it easier to find the perfect buyer or get a down payment for a new home. The seller financing may help them pay down debt or help to differentiate the property from other listings. Seller financing can also help the seller to get more than the home's asking price. Seller financing might help the buyer, but it also benefits the seller.
Some sellers cannot afford to lend money to the buyer. They dislike taking on the loan's risk when a standard mortgage is easier. Not knowing how to do owner financing and disliking risk are two of the main reasons why this type of loan is still less common.
How Seller Financing Helps Buyers
1. Lower Closing Costs
Closing costs can be extensive for home loans. With seller financing, buyers get the same home for less. They get to skip out on appraisal costs and bank fees.
2. The Closing Process Is Quicker
With seller financing, buyers do not have to wait for underwriters and bank loan officers to clear the file. Skipping this step can reduce the closing process by one or two months.
3. Down Payments Are More Flexible
A bank will require 3.5 to 20 percent of the home's price as a down payment. With seller financing, the down payment is whatever both parties agree to. This could be just as much as a standard down payment, but it can sometimes be much less.
The Downsides for Buyers
1. Buyers Have to Prove They Are Worth It
While the seller does not want to deal with a bank, they still want a qualified buyer. If the buyer does not have the income or credit to get a mortgage loan, the seller may not be interested in offering one either.
2. The Seller Could Sell the Promissory Note
While the seller owns the loan for now, they can sell it in the future. This is not a major issue since it only changes where the mortgage payment is sent every month.
3. Buyers May Have a Higher Interest Rate
Often, seller financing is done for a higher interest rate than most banks would charge for a mortgage. This is because the seller wants to earn more with the loan than they would investing the same money in a different financial vehicle.
4. Buyers Need to Do Due Diligence
It is important that buyers make sure that the seller actually owns the house completely. If not, they need to make sure the seller's lender approves of the new transaction. Otherwise, the mortgage company can find out that the seller sold the property. Then, they will demand immediate payment or foreclose on the property.
Sellers can offer financing by adding this option to the real estate listing and offering information to potential buyers. Meanwhile, buyers should look for seller financing options as they search for the right home. They can ask the seller to offer it and provide information about their financial situation. Once the both parties agree on the financing agreement, the home sale can go through.
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