Rising interest rates could negatively affect home sales prices. As most buyers qualify for a mortgage based on the monthly paynents they can "afford" according to the lender's criteria. If you’re selling your home, you might not want to deal with the financing process that can sometimes add hassle to a sale. One solution could be owner/seller financing, also known as a purchase-money mortgage.
How does seller financing work?
Seller financing occurs when the owner of a property for sale provides partial or complete financing to the buyer directly, after the buyer makes a down payment. So you as a seller essentially act as a lender, and can earn intererst just as a bank would. A promissory note is created, setting out the interest rate, schedule of payments from buyer to seller, and the consequences should the buyer default on those obligations. Unlike a sale involving a mortgage, there is no transfer of the principal from buyer to seller but merely an agreement to repay that sum over time.
Seller financing is usually not reported on the buyer’s credit report. There is typically a substantial down payment required (usually 10 percent to 15 percent) that makes up for the fact that the financing isn’t dependent on the buyer’s income or credit history — although sellers are advised to perform a credit check regardless.
Owner financing can be beneficial to buyers who aren’t eligible for a loan from a mortgage lender, or if the lender only qualifies the buyer for a portion of the purchase price. In the latter scenario, the buyer might be able to take out a first mortgage from the lender for that portion, and then obtain owner financing for the shortfall. Keep in mind: If you’re otherwise qualified but can’t get the full loan amount you need from a lender, you could be overpaying for the home.
This arrangement can also have benefits for sellers seeking income - as you can usually sell your house for more and earn interest on themoney owed. If that is sometging you are considering and would like to sell your house in Maryland offering seller fiancing contact Easy Outs Homes today to see how we can help. It likely won’t be an option if the seller needs the proceeds from a sale to buy another home.
In most owner financing arrangements, the owner (seller) records a mortgage against the property, which is sold via deed transfer to the buyer. In land contract arrangements (more on that below), the owner might instead retain the title as leverage.
Typically, the owner lets the buyer take over and move into the house without a mortgage, but after the buyer makes a down payment.
The buyer makes mortgage payments to the seller over an agreed-upon amortization schedule at a specified fixed interest rate. Typically, the seller will not hold that mortgage for longer than five or 10 years (sometimes longer). After that time, the mortgage commonly comes due in the form of a balloon payment owed by the buyer. Usually, by refinancing, or by improving and selling the property.
Types of Seller Financing
Second mortgage – If the homebuyer can’t qualify for a traditional mortgage for the full purchase price of the home, the seller can offer a second mortgage to the buyer to make up the difference. Typically, the second mortgage has a shorter term and higher interest rate than the first mortgage obtained from the lender. With a shorter term, you’ll need to be prepared to pay it off when the time comes — if not, you’ll be forced to refinance.
Land contract – In a land contract agreement, the homebuyer makes payments to the seller on an agreed-upon basis. When the buyer finishes the payment schedule, they get the deed to the property. A land contract typically doesn’t involve a bank or mortgage lender, so it can be a much faster way to secure financing for a home. Many states allow sellers to foreclose if you miss a payment, however, so there’s also considerable risk.
Lease-purchase – With a lease-purchase agreement, the homebuyer agrees to rent the property from the owner for a period of time. At the end of that time, the buyer has the option to purchase the home, usually at a prearranged price. Typically, the buyer needs to make an upfront deposit before moving in and will lose the deposit if they choose not to buy the home. If you’re the buyer in this situation, negotiate the price of the option and make it subject to financing, clear title and other contingencies, just as if you were buying a home the traditional way.
Wraparound mortgage – Home sellers can use wraparound financing when they still have an outstanding mortgage on their home. In this situation, the owner agrees to sell the home to the buyer, who makes a down payment plus monthly loan payments to the owner. The seller uses those payments to pay down their existing mortgage.
Assumable mortgage - Assumable mortgages allow the buyer to take the seller's place on the existing mortgage. Some FHA and VA loans, as well as conventional adjustable mortgage rate (ARM) loans, are assumable, with the bank's approval.
Pros and Cons of Seller financing for a seller
Potential for a good return if you find a good buyer
Receive monthly income
Taxes on a sale are paid over time, instead of lump sum
Sellers, in turn, can usually sell faster and without having to make costly repairs that lenders typically require. Also, because the seller is financing the sale, the property may command a higher sale price.
Agreements can be complex and limiting
Many lenders won’t allow unless you own home free and clear (but there is a workoaround for it, contact us today if you are considering seller finance)
Need to thoroughly vet the buyer and their finances
Potential for buyer to default or damage home, meaning you’ll have to initiate foreclosure, make repairs and/or find a new buyer
Seller financing can be a useful tool in a tight credit market. It allows sellers to move a home faster and get a sizable return on the investment. And buyers can benefit from less stringent qualifying and down payment requirements, more flexible interest rates, and better loan terms on a home that otherwise might be out of their reach.
Do you need your property to sell quicker? Every month that your home doesn't sell, you have to pay for insurance, utilities and other services associated with the house. This can significantly cut into earnings from the sale. Plus, if you are making mortgage payments on two homes at once, this can cause a significant strain on household finances. If your home is not moving as quickly as you'd like, putting seller-financing on the table might help to get you the sale you want!