Understanding Seller Financing
Over the last 20 years the real estate market has seen a lot of fluctuation. After the housing collapse in 2008, federal mortgage lending regulations have become increasingly strict. At the same time, many people lost everything they had as a result of a poor economy and have been rebuilding their financial status. Over the last 7-8 years the real estate market has rebounded and recovered. The only issue is lending restrictions still remain tight. This alienates a large group of potential homebuyers out of the market. The good news is that seller financing allows these buyers to purchase homes and it gives sellers a wider audience to sell to.
What is Seller Financing?
Before entering into a seller financing scenario, both parties should understand the implications of seller financing.
Seller financing is a scenario where the party selling a home provides financing to the buying party. The seller of the property acts as the bank, providing the home loan. The buyer or new homeowner is the borrower on the loan. Once the home sale has closed, the legal ownership of the property is passed to the buyer. The buyer is now responsible for the homeowner’s insurance, property taxes, maintenance and other costs of homeownership.
How Seller Financing Works
1- At the time of the home sale, the buyer and seller also negotiate loan details.
2- The seller will perform their own underwriting to determine the financial standing and credit worthiness of a buyer. Some items they may look at are:
– Credit Report
– Financial Assets
– Rental Payment History
– Employment and Income
3- If the seller feels that the buyer is a good loan candidate they will make formal loan arrangements. Buyer and seller will execute formal loan documents including a promissory note that outlines the principal balance of the loan, the interest rate and amortization schedule.
4- Documents will outline the ramifications of defaulting on the loan and the rights each party has in these situations.
5- The home is sold and both buyer and seller attend closing.
6- Ownership of the property is now given to the buyer. They are responsible for maintaining the property and paying for property taxes, homeowner’s insurance and homeowner association dues associated with the property.
7- The new owner now makes monthly payments to the seller.
Facts About Seller Financing
• The seller providing financing may sell the loan to another investor if agreed upon in the original loan documents.
• Many seller financed loans offer short terms of about 5-10 years with a balloon payment due at the end of the loan.
• Buyers may refinance their property at anytime to pay off a seller financed loan if they qualify for more traditional lending.
• Seller financing is more common in real estate markets with stricter mortgage loan guidelines and a lack of qualified buyers.
• There are advantages to both the buyer and seller with seller financing.
• Seller financing can be uncommon due to the lack of knowledge surrounding it.
Benefits of Utilizing Seller Financing
Easier to Purchase a Home
Utilizing seller financing can give buyers with subpar credit the opportunity to purchase a house. Since the housing collapse in 2008, mortgage lending guidelines have become increasingly stricter. Many people are looking to purchase a home but cannot qualify for a conventional loan. It can be easier to obtain seller financing with a less than perfect financial and credit background.
Close Home Sale Quickly
It has been shown that home sales using seller financing close up to 70% quicker than sales using traditional lending. Both buyer and seller agree to the details of the home transaction and don’t have the red tape from lenders to adhere to. This eliminates the middle man and saves lots of time.
Strong Financial Investment for Both Parties
Buyers can get into a home ownership and save money on their monthly housing expenses while building equity. Sellers can sell a home and receive interest on a loan while no longer maintaining the property.
Saves Money Upfront
On average, seller financing home sales require less of a financial investment upfront. Sellers maybe willing to offer a lower downpayment that traditional lenders. In addition you avoid paying many of the closing fees that are associated with using a lender.
Purchase a Home with Untraditional Career
Most lenders want borrowers that look good on paper. They want them to fit within a specific mold and meet stringent criteria. Seller financing is a great option for those self employed entrepreneurs that may not be able to provide all of the documentation required by lenders.
Larger Variety of Homes to Purchase
Lenders have stringent guidelines on the types of homes they will lend money for. They require a full appraisal that outlines the condition of the property. Their property guidelines may eliminate options from buyers looking for a home that needs more work.
Tips for Using Seller Financing:
1- Utilize a real estate attorney to protect the interest of both parties. Their knowledge can save time and money for both the buyer and the seller.
2- Sellers should include “seller financing available” on real estate listings, and buyers should look for these words in listings.
How To Find Seller Financed Homes
Looking for available homes with seller financing offers does not need to be difficult. In today’s current market, there is a decent inventory of homes owned by real estate investors. These investors are likely to agree to seller financing. Look at listings to see if seller financing is mentioned. If it’s not, don’t be afraid to ask. The worst answer you’ll get is no anyway, but you never know what the seller may agree to.
Another way to find seller financed homes is to reach out to real estate investors directly. Contact us at House Cash Now and mention that you are looking for a seller financed home. Let our real estate professionals look around at our inventory in your area to see what properties we are currently offering with seller financing.
Relying on traditional mortgage lending to buy a house is not necessary. Seller financing allows investors to sell properties to a wider range of buyers. It also gives buyers the opportunity to enter into homeownership much sooner. With a carefully drafted loan, both seller and buyer can enjoy the many benefits of seller financing.