The Ins & Outs of Seller Financing

Occasionally, a seller will come into a situation where the buyer cannot get a loan for the full asking price, or their credit is low and cannot get a mortgage.  In these cases, the buyer may ask the seller to finance the sale.  This is known as owner financing, seller financing or a purchase-money mortgage.  This type of lending is usually a short term loan, and the seller may choose to offer a lower interest rate than the mortgage company does.   This type of loan would be a binding contract with certain terms, that if violated, could lead to a breach of contract.

Seller Advantages/Disadvantages

In a seller financing situation, there are both advantages and disadvantages to financing the selling of their home.  One advantage is the seller can set terms that fit their needs.  While they can set a low interest rate, initially, the seller may increase the interest rate significantly from year-to-year or add a balloon payment.  In doing so, the home would be paid off faster.  However, increasing the quickly and in big jumps, the buyer may not be able to make the payments.  This can lead to a foreclosure, which would be a big disadvantage to the seller.  In a foreclosure situation, especially if the buyers will  not leave, the seller must pay for the foreclosure.  The money you do receive back may be paid in small increments and will take longer to satisfy the loan.

How to Make It Work

First, you need to make sure you are financially sound to be able to offer this option. Secondly, work with a real estate attorney to write up the loan contract and terms.  This allows you to make sure all the t’s are crossed and the i’s are dotted.  The attorney can also inform you of the state’s real estate laws as well as those at the federal level.   You will want to make sure the loan contract spells out how the repayment will be done, as well as, listing what costs the buyer will be responsible for (taxes, HOA fees, etc.).

It is best to have the buyer submit a financial background check.   There are several companies that can do these background checks for around a $20 charge to the buyer.  Also, collect the Earnest Money as soon as the contract is signed.  You may want make this a larger than normal amount.  This way it is more of an incentive for the buyer to do what they need to make payments, as this Earnest Money could be non-refundable.

Read the Original Article Here: Here’s How Owner Financing (aka Seller Financing) Works for Real Estate Deals