Seller Financing Overview
Seller financing means that you can get a mortgage from the property seller instead of a bank to purchase a home. Let's look at the pros and cons of this approach for both buyers and sellers.
When Should You Use Seller Financing?
Seller financing is very rare, especially in hot real estate markets where buyers are plentiful.
When banks lend less and/or buyers are in difficult economic times, seller financing is more common.
Seller financing requires that sellers own their homes or have sufficient equity to cover their existing loans.
If someone were to sell their home for $300,000.000 and owed only $30,000 on their loan, they might require a 10% down payment from a buyer to obtain seller financing. However, the 10-percent down payment would be sufficient to pay the $30,000 loan, and then they could get seller financing for the $270,000 remaining.
They would owe $150,000 on their existing loan if they were to sell their home. In addition, the buyer would need to have their lender's permission to provide seller financing. Unfortunately, this permission is extremely rare.
When buyers should use seller finance, the most common reason is that they might not be eligible for traditional bank loans.
It could be due to a buyer's poor credit, income, or asset profile. It could also be due to the fact that the property requires repairs that traditional lenders require before funding the loan.
Both cases offer seller financing as a way to purchase a home without having to meet traditional lender requirements.
Positive And Negative Of Seller Financing
Seller financing offers buyers the following benefits:
More stringent loan approvals:
Even the most skilled sellers won't subject borrowers to the same strict federally-required loan approval processes and banks' documentation.
No mortgage insurance for low-down-payment deals:
Mortgage insurance is required for most bank loans that have less than 20% down. It can range from 0.45 percent up to 1.05 percent. This adds $101 to $236 monthly to the $270,000 loan.
Seller financing offers key benefits to sellers:
Control of the closing:
Bank-financed deals are subject to the viability and timing of any bank financing. Seller financing allows them to close quickly because they are the lender.
A good source of income:
Seller financing provides a monthly income stream that the seller can depend on instead of a lump sum payment at the close. The seller can also get their equity back after the loan is paid off, as well as a rate-of-return (the interest rate they charge to the buyer).
Both buyers and sellers can reap the following key benefits:
Lower closing fees:
Seller financing eliminates bank fees which makes the transaction more affordable for everyone.
Property may close "as-is.":
Seller financing does not require that the seller make repairs to the property in order to close a loan.
A reliable way to rent to tenants:
The buyer can be a tenant looking to purchase the home. In this case, the buyer will get the house they already live in, and the seller will already know about the buyer's payment history and creditworthiness.
The Cons Of Seller Financing
Buyers who use seller financing have to be aware of the following:
The seller's risk can be assumed by the buyer unknowingly:
The buyer may inherit any liens, claims, or obligations from creditors that the seller does not know about.
Less structured monthly payment processing:
Seller financing makes it more difficult to make auto payments. You might also not get monthly loan balance updates and payment statements reliably, as a private lender doesn't have a system for billing.
Seller financing has its drawbacks:
There was less cash available at closing:
The seller trades lump sum cash in exchange for monthly payments.
High-risk income stream:
The seller won't know whether a buyer will pay in the future. The buyer may lose their job or die. A seller takes on the same risk like a bank.
Both buyers and sellers face key drawbacks:
Less clearly defined legal process:
Federal regulations govern how banks approve loans. They outline what they are required to do and how they can be protected if they comply with the regulations. Both the seller and buyer are protected when they approve a loan to them.
Complex and lengthy foreclosure process:
Both buyer and seller will be in for a lengthy, costly foreclosure process if the buyer cannot pay.
Use Seller Financing: Tips
Do not try to save money by avoiding using lawyers or real estate agents. Professional advice is required for both buyers and sellers to protect their individual interests.
Buyers and sellers can easily find a good agent who can often recommend an attorney.
A mortgage lender should have pre-approved buyers. This will allow them to know their financial capabilities and not have to rely on the seller. Buyers will be able to see their end game by doing this. Buyers should find out if they are eligible for bank financing before buying. Seller financing terms often require that the loan be paid back within three to seven-year.
