Homes offering seller financing comprise a small percentage of the real estate market. Many of the homes offering seller financing are doing so to help buyers who have yet to secure traditional bank loans and are looking for an alternative means to finance their home purchase. This allows the seller create better terms for themselves while also facilitating the sale of the property. If you’re interested in buying a home with seller financing or in putting one on the market, here’s what you need to know:
How it works
In this type of arrangement, the seller lends the buyer money for the home instead of the latter approaching the bank for a loan. In short, the seller becomes the buyer’s lender.
Both parties will sign a promissory note stating the price, interest rate, and other terms of the agreement. The buyer then makes mortgage payments to the seller, who earns off the interest on the loan. If the seller decides to sell the promissory note, the buyer will make payments to the investor who purchases it.
Price and terms
The buyer and seller must agree on the price, but this is only one component of the promissory note. They must also discuss the interest rate, down payment, timeline, repayment schedule, late payment penalty, and default consequences.
Most seller-financed loans are short-term loans that last five years or so, usually with a balloon payment due towards the end if the buyer manages to refinance. If the buyer can’t hold up their end of the bargain, the seller can foreclose and take the home back, as with a traditional mortgage.
No matter how carefully worded the contract is, it’s best for all parties to agree on contingencies ahead of time. They’ll have to discuss what course of action to take if, for instance, the buyer becomes unable to make payments, loses interest in buying the home, or decides to use the home for purposes not previously discussed.
It’s crucial to work with an attorney when drafting the contract in order to make sure that the financing deal is structured properly, and to protect your interests. Sellers, for example, may want to include a clause that keeps the ownership of the property in their name until it’s fully paid.
Selling the promissory note
Sellers can cash out early if they decide to sell the promissory note to another investor. There are private investors and mortgage brokers who pay cash for notes, usually at a discount, and they in turn will receive the buyer’s monthly payments. Sellers who do this will get a lump sum instead of monthly installments, which gives them the freedom to buy a new residence or another investment.
For buyers, this only means that the person they’ll be making payments to will change. This is no cause for concern since the same thing often happens with a traditional mortgage.
The benefits of seller financing
Compared with traditional lending, which has stringent standards and requirements, seller financing allows buyers and sellers to be more flexible and creative with structuring the loan. Everything is negotiable, from interest rate and loan term, to payment amount and payment dates.
It gives buyers an additional option if they’ve maxed out the number of mortgages they can get, and it helps sellers offload property that can’t be sold to bank-financed borrowers.
Seller financing is uncommon, but it is worth considering if you want to explore your options outside of the traditional mortgage marketplace. I would be glad to discuss seller financing in more detail. Contact me to learn more or call or text me at 760 622 5087.