Seller financing in real estate is when the person who is selling the house finances the purchase. In most residential real estate deals, the seller finds a willing buyer with the required income, employment history, and credit score to qualify for a mortgage. A lending institution such as a bank or a credit union then finances that mortgage for the buyer.
If traditional financing is unavailable, however, the buyer and seller may still want to proceed privately with the sale. In that case, seller financing is one of their available options. And you as a seller can become a bank, thus, making more money on the sale of your home then you normally would selling traditionally.
How Does Seller Financing Work?
A bank isn’t involved in a seller-financed sale; the buyer and seller make the arrangements themselves. They draw up a promissory note setting out the interest rate, the schedule of payments from buyer to seller, and there are 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. Instead, the agreement is that the buyer will repay that sum over time.
This alternative to traditional financing can be useful in certain situations or in places where mortgages are hard to get. In such tight conditions, seller financing provides buyers with access to an alternative form of credit.
The seller's financing typically runs only for a fairly short term, such as five years. At the end of that period, a balloon payment is due. The expectation is usually that the initial seller-financed purchase will improve the buyer's creditworthiness and allow them to accumulate equity in the home. Once that happens, they can then refinance their payment to the seller with a traditional lender.
Seller financing is sometimes called owner financing.
So, you have been a homeowner for many years and have built some equity in your home, but now it is time to sell and cash out. But what if you don't need the large sum of money just sitting in your bank and deflating and you don't really want to pay capital gains tax? The answer is to seller finance and become a bank, take payments overtime and get more money at the end. You no longer have to sell through an agent – you can sell on your own or you can even accept seller financing. If you’re wondering how to sell a house by owner financing in Harford County, MD and surrounds, keep reading this blog post and we’ll walk you step-by-step through the process…
Step 1. Determine whether you own the house outright or still have a mortgage
In some states, if you have a mortgage you may not be able to offer owner financing (but you can in other states). So the first step is to determine whether you have a mortgage or not.
Step 2. Talk to a real estate attorney for help in crafting an agreement
With seller financing, you are essentially acting like a bank. The buyer will pay you a down payment and then pay you regular monthly payments until the house is paid off, and then it becomes their house. So make sure you talk to a real estate attorney to ensure that you are protected and obeying all federal, local, and state laws while also protecting yourself! (If you need the name of a good real estate attorney, get in touch with us and we can make an introduction.)
Step 3. Market your house online and offline
Once your paperwork is in place, you are ready to advertise that you have a house for sale. Be sure to let people know that you offer seller financing. There is no limit to how much marketing you should do – the more you can do, the better.
Step 4. Work with potential buyers
As your marketing captures the attention of potential buyers, work with them to show them through your house. When someone makes an offer on your house, negotiate the price and terms with them and find the middle ground that will ensure a win/win situation. Sign the papers when you and the buyer reach an agreement.
Step 5. Collect the down payment and hand over the keys
Once you agree on a price and have signed the papers, collect the down payment and hand over the keys. In most situations, you will continue to own the house and collect payments until the house is paid off, then ownership transfers to the buyer.
If you’re wondering how to sell a house by owner financing in Harford County, MD and surrounding areas, we can help. We might be able to offer you some advice or even work out an owner financing arrangement where we buy your house from you. Talk to us at 443-616-5486 or by clicking here to fill out the form.
Advantages of Seller Financing
With only two main players involved, seller-financed sales can be quicker and cheaper than selling a home the customary way. There is no waiting for the bank loan officer, underwriter, and legal department.
This also means that closing costs are generally lower for a seller-financed sale, making the overall sale less expensive for the buyer (so they can offer you to pay more sometimes). Without a bank participating, the transaction avoids the cost of mortgage or discount points, as well as origination fees and a host of other charges that lenders routinely extract during the financing process.
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.
What Buyers Should Know About Seller Financing
For all the potential pluses to seller financing, transactions that use it come with risks and realities for both parties. Here's what buyers should consider before they finalize a seller-financed deal.
Don't Expect Better Terms Than With a Mortgage
As the terms of a seller-financed deal are hammered out, flexibility frequently meets reality. The seller digests their financial needs and risks, including the possibility the buyer will default on the loan, with the prospect of a potentially expensive and messy eviction process.
What Sellers Should Know About Seller Financing
Keep these tips and realities in mind if you're considering financing the sale of a home.
You Don't Need to Finance the Sale for a Long Time
As the seller, you can, at any point, sell the promissory note to an investor or lender, to whom the buyer then sends the payments. This can happen the same day as the closing, so the seller could get cash immediately.
In other words, sellers don't need to have the cash, nor do they have to become lenders.
Make Seller Financing Part of Your Pitch to Sell the Property
Because seller financing is relatively rare, promote the fact that you’re offering it, starting with the property listing. Adding the words "seller financing available" to the text will alert potential buyers and their agents that the option is on the table.
When potential buyers view your home, provide more detail about the financing arrangements. Prepare an information sheet that describes the terms of the financing.
Sellers should provide a general explanation of what seller financing is because many buyers will be unfamiliar with it.
Seek Out Tax Advice and Consider Loan-Servicing Help
Because seller-financed deals can pose tax complications, engage a financial planner or tax expert as part of your team for the sale. Also, unless you’re experienced and comfortable as a lender, consider hiring a loan-servicing company to collect monthly payments, issue statements, and carry out the other chores involved with managing a loan.
How to Structure a Seller Financing Deal
Both parties in a seller-financed deal should hire a real estate attorney or real estate agent to write and review the sales contract and promissory note, along with related tasks. Try to find professionals who are experienced with seller-financed home transactions. If possible, find professionals who have experience where you live; some relevant regulations (such as those that govern balloon payments) vary by jurisdiction.
Professionals can also help the buyer and seller decide on the particular agreement that best suits them and the circumstances of the sale. If it isn't a seller-financed deal, there are actually dozens of other ways to buy other than a traditional mortgage arrangement. These arrangements include lease-option, lease-purchase, land-contract, contract-for-deed, equity-sharing, and wrap mortgages. (Most buyers and most real estate agents don't know how any of these work. Reach out to us if you would like to sell your house in a creative way).
What Is a Balloon Payment on a Mortgage? A balloon payment is a large, on-time payment due at the end of a mortgage. Usually, before the loan ends, your payments are smaller than they would be with a standard mortgage. But you then have a large lump-sum due at the end of the loan.
Who Owns the Title to the House With Seller Financing? With a seller-financed loan, the seller typically continues to hold the title to the property. This is their form of leverage, or insurance, until the loan is paid off in full.
Why Home Sellers Offer Financing
It's rare, but a home seller might agree to loan a buyer part or all of the money to buy the property so as to create an incentive for buyers who can't borrow enough from a bank or commercial lender to buy the house.
Or, the seller's reasons may be tax related, since financing your purchase would allow the seller to spread out the income from the sale over a number of years.
How to Structure a Sale With Owner Financing
The first is for the seller to "take back" a mortgage on the house. The buyer signs both a promissory note (promising to repay the loan) and either a mortgage or a deed of trust (allowing the seller to foreclose if you fail to pay). In return, the seller signs a deed transferring title to the buyer.
The Bottom Line
Seller financing is an alternative to a traditional mortgage in which the seller finances the purchase, rather than a bank or other lender selling a mortgage to the buyer. It can be a helpful option in a challenging real estate market. However, the arrangement triggers some special risks for buyers and sellers, and it's wise to engage professional help to mitigate those and keep the process running smoothly.