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Offering Seller Financing as a Seller Can Improve The Chances of a Sale
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Commonly, buyers who cannot or do not want to pay for a new home or condo with cash take out a mortgage through a bank or other financial institution. Banks and financial institutions have strict underwriting standards and borrower requirements.
The process can often time-consuming, costly and riddled with stress. While this is the typical way to finance a real estate purchase, it is not the only option available. One alternative that we see more of in a buyer's market is seller financing.
What Is Seller Financing?
When a seller finances the transaction, he or she becomes the lender. The promissory note, put together by the title company during escrow, is between the buyer and seller rather than the buyer and a bank. This financing option is not available in many situations, either because the seller is not able or willing to do it.
However, a seller-financed transaction offers extensive advantages to both the buyer and seller when it is possible.
Seller-Financed Loan Terms
While a buyer is not subject to a bank’s stringent underwriting requirements, the seller will review applicable documents before deciding to finance the deal. The buyer’s credit scores, income and personal debt-to-income ratio are some of the details that often factor into the seller’s decision. While some sellers may have hard-and-fast requirements, others are more flexible and willing to consider extenuating circumstances.
The terms available through the seller are varied. Often, however, the term will be considerably shorter than what is available through a bank. As an example, a balloon payment may be due within a few years with amortization over 25 or 30 years.
From the buyer’s perspective, this provides enough time to refinance the loan with another lender. From the seller’s perspective, the relatively short financial commitment is manageable, and the return can be lucrative.
In many instances, the seller will require a down payment. However, the seller’s requirement may be lower than what a bank or financial institution will require.
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The Advantages of Seller Financing
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A seller-financed mortgage is advantageous for both the buyer and seller. For example, the seller may require fewer documents to review when making a decision to finance the transaction. There are fewer eyes looking at the documents, and the seller may not require an appraisal. As a result, the process is often completed more quickly and easily.
There are additional benefits for the buyer. For example, the closing costs are often lower, which allows the buyer to save money. The flexibility of the seller’s terms and consideration for a lower down payment amount may allow the buyer to purchase a house that he or she otherwise would not be able to afford.
Depending on the terms of the loan, the payments may also be more affordable.
For the buyer, the financing establishes fixed, passive income. While the buyer will not get the full lump sum of cash from the sale until the balloon payment is due, the down payment can be a healthy sum.
The payments made to the seller include both principal and interest, allowing the seller to get a sound return on investment. In the event the buyer defaults on the loan, the seller’s exposure to risk is minimized as the loan is collateralized.
Unfortunately, there isn't a way to filter a real estate search around which properties offer seller financing and often sellers don't want to offer it up front. Yet, we are still able to find these deals through networking and offering good terms.
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The Downsides of a Seller-Financed Transaction
While the benefits of a seller-financed mortgage are significant for both parties, there are downsides. For example, the buyer must refinance the loan before the balloon payment is due or risks losing the property to foreclosure.
For a seller, full access to the property’s equity is not available for several years until the buyer refinances the loan.
Often, a seller has plans for that equity, such as buying a new home. In addition, while the seller can foreclose on the property if the buyer defaults on the loan, foreclosure is a stressful and expensive process. For both parties, lawyers typically need to be hired to prepare the financing documents, promissory note and other documents.
Alternatives to Consider
An all-inclusive mortgage is the most common structure for a seller-financed mortgage, but there are other options. A junior mortgage, for example, takes a second position behind a bank-funded first mortgage. This decreases the seller’s exposure to risk while potentially enabling the buyer to put less money down.
A land contract is another option. In this situation, the buyer will not have title to the land. Instead, the title is conveyed to the buyer after the last payment is made. A lease option is another alternative.
The payments can be structured so that a portion of the lease payments are applied to the purchase at a later date. Some sellers have an assumable mortgage, which means that a buyer can take over making payments on the established mortgage, but this is very rare.
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How to Line Up a Seller-Financed Mortgage
In some cases, a seller will offer to finance the transaction as an enticement to potential buyers. In other cases, the buyer approaches the seller with a financing request.
Regardless of whether the offer is initiated by the buyer or seller, the terms should be advantageous to the other party. Even then, however, negotiations may ensue.
Seller financing is most likely when the seller owns the property outright. If the seller has an existing mortgage, that mortgage loan must be paid off before the sale can be finalized. The seller would then need to pay off the mortgage with his or her own proceeds for the transaction to work.
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Explore Your Options Today
Seller financing is not suitable or feasible for all situations, but it may help you achieve your goals as a buyer or a seller. Whether you are a buyer or a seller, discuss this possibility in detail with your real estate agent to learn about your options.
Evan Harlow ranks among the best real estate agents on Maui annually and is in the top 1% of Coldwell Banker agents worldwide in production. Evan has the expertise,
experience, and work ethic to help you achieve your real estate buying and selling goals. We promise
exceptional service and support from the beginning of the process through closing and beyond. See what Evan's clients are saying on Google. Get In Touch With Evan!
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Posted by Evan Harlow R(S) on
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