Seller Financing
If you've decided to buy a home, but you're having trouble obtaining financing going through more conventional channels, you may want to consider seller financing. While seller financing is seen as an alternative method of getting the money to purchase a home, it has been very popular for many years.
Seller financing is often described as a mortgage between the seller and the buyer where the seller "holds the paper." This is because in this type of arrangement the person selling the house is the mortgagor and you make your mortgage payments to the seller.
Like most non-conventional mortgages, seller financing has its pros and cons for both buyers and sellers. Seller financing is a great alternative for buyers who, for whatever reason, whether it be less than perfect credit or some other reason, cannot obtain more conventional financing on good terms or any terms at all. However, if you buy a home financed by the seller, you should be aware that the interest rate almost always is higher than the prevailing rate at that time for more conventional mortgages. This is because the seller is perceived as doing the buyer a favor by carrying the mortgage.
Many sellers who offer financing are having trouble selling their home and are using seller financing to sweeten the pot. These sellers may also be less negotiable on the selling price of the home, knowing that without their financing the buyers may not be able to buy a home any other way.
What's in it for the seller? Sellers do assume a greater risk when they provide the financing for their buyers. Instead of simply getting a check from a bank at the closing, they run the risk of defaulting or late-paying buyers. Given this fact, why would a seller provide the financing? There are several reasons.
As we already pointed out, sellers that offer financing have leverage over buyers in terms of the selling price of the home and charging a higher interest rate. Also, as we state above, seller financing may be just what is needed to sell a home that isn't getting many offers on the market. In turn, the seller receives a monthly payment (or whatever is worked out between the parties). For this reason, a majority of the sales of homes financed by sellers are older owners that usually have paid off their mortgage, have other investments, are retired and are moving to smaller quarters. Unlike younger sellers, they don't need the entire selling amount all at once to use as a down payment on another, often larger home. The monthly mortgage check is another source of income for them.
The buyer default risk. What about the risk of default on the part of the buyers? Unlike a bank, this is almost always the biggest chunk of money individuals or couples are dealing with. While it would admittedly be a hassle, if a buyer defaults, the seller can foreclose on the mortgage (just like more traditional lenders) and take over ownership of the home. At that time, the seller would resell the home and receive the proceeds from the sale.
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Warning
Because of the large sums of money involved and the potential of default if the buyers are not a perfect credit risk, we strongly advise sellers providing financing to consult with a real estate attorney. Sellers will want to make sure that the proper, allowable credit checks are done on the buyers (they may be too great of a risk for certain sellers) and that the agreement between the seller and buyer is properly drafted. If the buyer should default, an attorney drafting the papers should make sure the proper liens attach to the property in favor of the seller.
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Assuming the mortagage. Although not technically seller financing, assuming the seller's mortgage is another method of getting financing to purchase a home. If a mortgage is assumable, you basically step into the seller's shoes. However, most private lenders specifically prohibit the assuming of their loans. If it is possible, you should only consider this method if you're having trouble getting financing with more favorable terms.
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