Seller Financing

In a credit crunch, seller financing can be a valuable method. It enables sellers to sell their homes more quickly and earn a higher return on their investment. Buyers can also benefit from down payment conditions, less strict qualification and more flexible rates and loan terms on a home.
Just a small percentage of all sellers — usually less than 10% — are willing to take on the role of the financier. This is due to the deal’s legal, financial and logistical challenges. However, sellers can minimize the inherent risks by taking the necessary precautions and enlisting professional assistance.

 

How It Works

The seller assumes the role of a lender in seller financing. Instead of giving the buyer cash, the seller provides the buyer with enough credit to cover the home’s purchase price minus any down payment. A promissory note needs to be signed by both the buyer and the seller. They file a mortgage with the local public records authority (or “deed of trust” in some states). The buyer then pays the loan back over time, usually with interest.

These are usually short-term loans and have a hefty payment that is due within five years. The idea is that the home will have increased in value enough or the buyer’s financial status will have changed enough to be able to refinance with a conventional lender in a few years.

The short period is also realistic from the seller’s perspective: Sellers don’t have the same life expectancy as a mortgage lending company nor do they have the stamina to wait 30 years for the loan to be paid off. Furthermore, sellers do not want to take on the risk of extending credit for longer than is required.

When a house is free and clear of a mortgage, a seller is in the best position to provide seller financing. If the seller already has a large mortgage on the house, the seller’s current lender must approve the sale. Risk-averse lenders are seldom able to take on the extra risk in a tight credit market.

 

Seller Financing Options

Here’s a short rundown of some of the most popular seller financing options.

 

Junior Mortgage

A junior mortgage is a loan taken out by lenders hesitant to fund more than 80% of a home’s worth in today’s economy. The seller will take out a second mortgage for the difference between the down payment and the purchase price. The borrower collects the first mortgage proceeds from the buyer’s first mortgage loan right away. However, holding a second mortgage exposes the seller to the possibility of accepting a lower priority if the borrower defaults.

The mortgage is only owed after the first lender has been paid off in the event of a repossession or foreclosure. Furthermore, a bank may refuse to make a loan to someone with too much debt.

 

Lease

Like a standard rental, the seller rents the property to the buyer for a fixed duration. Still, in exchange for an upfront fee, the seller then offers to sell the property to the buyer later and on agreed-upon terms (possibly including price). The rental payments can be added in part or in full to the purchase price. Lease options are available in a wide range of shapes and sizes.

 

All-Inclusive Mortgage Loan

The promissory note and mortgage on the entire balance of the home price, less any down payment, are carried by the seller.

 

Contract for the purchase of land

Land contracts do not grant the buyer rights to the property; instead, they give the buyer “equitable title,” or a temporary share of ownership. The buyer receives the deed after the final payment has been made.

 

Assumed Mortgage

This allows the buyer to take on the seller’s mortgage. Some FHA, VA loan, and traditional adjustable-rate mortgages may be assumed with the bank’s approval.

 

Real Estate Attorney Near Me

Both the seller and the buyer would almost certainly need the services of an attorney, a real estate agent or another professional with expertise in seller financing to draft the necessary paperwork.

If you need legal assistance for an issue related to real estate, contact Attorneys Real Estate Group today. Please contact us online or by phone at (800) 481-4049; we look forward to assisting you.