Seller Financing Overview

A contract to sell a house can provide a steady income stream and attract buyers who may not be eligible for traditional mortgages. You can also collect interest when you sell your home under contract. This is similar to what a lender would do on a traditional mortgage. As a result, you may get a higher rate of return depending on the amount of interest you can charge.

Selling a house under contract can be dangerous if you don't take precautions to protect your biggest asset, your home. Selling on contract is usually only possible for homeowners who are the owners of their home. Let's begin by clarifying some key terms.

What Is Seller Financing?

Seller financing is also known as owner financing. This means that the seller finances the property instead of the buyer getting a mortgage from a traditional lender. The seller pays a monthly fee that covers principal, interest, taxes, and homeowners insurance. After a specified period (typically no more than two years), the buyer pays a monthly payment to the seller that covers principal, interest, taxes, and homeowners insurance. The buyer then takes ownership of the house with a balloon repayment.

What Is A Land Contract?

A land contract is a contract that results in a seller financing arrangement. This whole process is sometimes referred to simply as "selling a home on contract."

A land contract is a legally binding, written contract that both the buyer and seller sign. It details how much the buyer will be paying each month, as well as principal and interest. People will sometimes use the terms "selling under contract" or "land contract" interchangeably.

A land contract is different from a rent-to-own arrangement. Rent to own is a form of renting, where the buyer pays rent monthly, plus a small amount that goes towards principal as part of an option to purchase agreement.

What Is The Difference Between A Land Contract And A Mortgage?

While they are both forms of home-purchase financing, the land contract is different from a traditional mortgage in some important ways.

The Deed Is Not Transferred: A seller financing agreement allows the seller to keep the title and deed until the land contract has been paid off and all terms have been fulfilled. The seller retains the title, but the buyer has an equal interest in the property. This prevents the seller's simultaneous sale to another person.

The Seller Has The Power To Set Financing Qualifications: You, as the seller, can establish your own criteria for who qualifies. This means that you can offer buyers a lower credit requirement, lower down payment, or lower interest rate than traditional lenders.

The Contract Is Typically Shorter: Unlike traditional mortgages that are paid off over 15 to 30 years, seller financing is much quicker. Most seller financing agreements last for two years. The transfer of title is initiated by a balloon payment at the end of the two years. The buyer may pay the balloon payment in cash. However, more often, they will obtain a mortgage from traditional lenders to finalize the purchase.

Benefits Of Selling Your House Under Contract

Seller financing is attractive because it opens up new buyers and gives you more control over how your equity is distributed.

• Attract More Buyers:

  Buyers often are interested in seller financing as they are not eligible for traditional mortgages or cannot qualify for an interest rate that makes a home affordable. Seller financing is a great way to make your home more appealing to potential buyers if it has been sitting on the market for some time without any offers.

• Make Monthly Income:

  Some sellers prefer monthly payments instead of one lump sum at closing. You can keep your finances under control and help you reach your future goals by receiving your equity in small increments as the buyer makes monthly payments.

• Collect Interest:

  Depending on the current mortgage interest rates, and you may be able to charge up to 5% interest in addition to principal payments. You might get a higher return if you sell on contract, depending on what other investments you make. The interest rate is up to you. You might consider a lower down payment or a higher interest rate to buyers with bad credit.

• Close Quicker:

  A traditional bank is not involved in closing the deal. There's no appraisal and no underwriting by a lender. This can save both sides money and help them to close quickly.

• Negotiate A Higher Price For Your Home:

  Since you are helping the buyer "pre-purchase" their house, it is possible to negotiate a higher price to reflect the fact that the home's value will increase over time.

You Can Spread Out Your Capital Gains Tax Payments Because your equity is received a small amount at a time, your tax liability can be spread over many years. Every person's financial situation differs. Talk to your tax professional about your capital gains tax liability.

There Are Some Drawbacks To Selling A House Under Contract

There are many benefits to selling your house under contract. However, there are also some drawbacks.

• Assuming Risk:

  You must be diligent when vetting potential buyers to ensure that they can make all payments and maintain the home.

• Attracting Qualified Buyers:

  If you offer seller financing, buyers might not be able to qualify for traditional lender financing. This could include buyers with poor credit, low income, or previous defaults. You don't want to waste your time or get too excited by unqualified buyers.

  The Inability To Access Equity: If you need a lot of cash during the seller financing agreement, you won't be able to access it until the buyer pays off the loan.

How To Sell Your House With Seller Financing

Check with your lender before you seriously consider seller financing. Your lender may not approve seller financing arrangements if you are still paying your mortgage. Sellers who are free from a mortgage and have the house in their own name are the best candidates to finance the seller.

1. Locate A Buyer

 Ask your agent if they are familiar with seller financing. They can be of great assistance.

2. Establish A Purchase Price

Use recent comparables in your area to determine a suitable purchase price. For example, you may need to set the price slightly higher than the current market value to reflect the increase in the home's worth between the time you begin the seller financing agreement and when the buyer has paid off their loan and becomes the owner.

3. Make A Land Agreement

It is best to have a real estate lawyer to help you navigate this transaction, as it involves your most valuable asset. These are the important points to ensure that your land contract contains the following information:

• Sale price

• Amount of down payment

• Monthly payments with interest

• Maintenance and upkeep are the responsibility of the buyer

• Payoff date and amount of balloon payments

• Title transfer date

• Other conditions, such as late payment fees and title insurance

4. It Should Be Notarized

To make sure that the contract is fully valid, have both parties sign it and date it. Then, have it notarized to confirm its validity by a notary public.

5. Establish A Disbursement Bank

A third party manages a disbursement account. They coordinate payments between buyers and sellers and pay property taxes and homeowners insurance premiums. You can keep your address secret to maintain a professional business relationship with the lender, just like traditional mortgage lenders.

Tips For Sellers In An Owner-Financing Land Contract

You will be taking on the role of lender, and you should thoroughly vet the buyer before you offer a seller financing contract. These are some things that you should do to protect your financial interests.

• Verify The Credit Score Of The Buyer

  Pre-approve your buyer like a lender before you sign the contract. Check their credit history. You should be alert for red flags such as missed payments and defaults on mortgages.

  Some people may be able to obtain seller financing because they have a low credit score. You might still be able to move forward even if you have a valid reason for having a lower credit score than desired, such as a divorce or financial problem that has since been resolved.

• Verify The Income And Employment Of The Buyer

  You'll need to confirm that the buyer can afford the monthly payments, just like a lender. Ask for proof of funds or confirm their income with the HR department at their employer.

• Make A Substantial Down Payment

  You can request a higher down payment than 20%, especially if the buyer cannot repay their credit card. This will lower your risk of financial loss.

• Include A Late Payment Fee

  Your contract must contain a penalty for late payments. This will keep buyers motivated and provide an incentive to pay on time.

• Refer To References

  Buyers with poor credit ratings may find it helpful to ask for professional references. This can help you feel confident about their ability to handle your responsibility.

• Get Insurance

  To minimize your risk, request that the buyer has both title and homeowners insurance.

• Take Into Account The Loan Term

  A 30-year loan term is not something you want. Most seller financing agreements are for only two years. A shorter term is safer and allows you to retain more equity. However, it also gives buyers time to build their credit so they can secure traditional financing.

• A Lawyer Is Available For Hire

  In certain states, attorneys may be required to supervise any real estate transaction. Owner financing is also included. Even if it is not mandatory, it is a smart idea to hire a lawyer to oversee any seller financing transaction. This will ensure that you keep your title and provide recourse in the event of default by the buyer.

• Property Maintenance Is Important

  Ensure that the buyer maintains the property during the term of the financing agreement. While the ultimate goal is to get the title and purchase the entire home, it's not ideal for putting the house back on the market if the buyer defaults.

  Discuss with your attorney the possibility of including an acceleration clause in your contract. This will allow the buyer to find alternate financing if the property falls into disrepair. In addition, this will encourage the buyer to take care of the property to avoid any breach of contract.

• Know Your Foreclosure Rights

  If the buyer fails to pay their monthly payments, the seller may initiate foreclosure proceedings in some states. This is known as "land contract forfeiture," and the buyer must pay their down payment and any monthly payments that they have made so far. They also lose their equitable title. Your buyer may be entitled to a redemption period, depending on where they live. This is a period that allows them to complete the deal. Before you can start a foreclosure, make sure you know how many missed payments your state requires.