Guide to Seller Financing When Selling Your Home
Not every seller is in the position to offer seller financing, but those that do can benefit from a sizeable return and may be able to close on a home faster. This can be a useful option for those wanting to sell in a market with stringent credit requirements for buyers. It is important for a homeowner to consider whether seller financing can be a practical alternative and if it is possible to take on the responsibility of financier. Understand more about seller financing and when it is a useful choice to sell a home.
What Does Seller Financing Mean to the Homeowner?
Not everyone can assume a lender's role, and that is what is involved in seller financing. The seller will extend credit to a buyer to cover the purchase price. The buyer remains responsible for coming up with the down payment. Both parties sign a promissory note and take steps to record a mortgage. The buyer is then responsible for making regular payments to pay off the loan. Generally, the loan includes interest.
This type of loan is not meant to apply for the life of the loan. Rather, it is expected that in a few years enough equity will be established in a home or the financial situation of a buyer will improve to a level that they can then refinance their loan with a traditional lender. This type of short term loan reduces some of the risk of extending credit as situations can change that may impact either party. No seller wants to wait 30 years for a buyer to pay off a home loan.
What Are Some Seller Financing Choices?
There are a few arrangements that a seller may offer to a buyer. Seller financing options include:
- An all-inclusive mortgage deed (AITD);
- A junior mortgage;
- A land contract;
- A lease option; and
- An assumable mortgage.
There are a variety of arrangements whereby the buyer only gets the deed after making all payments. It will be necessary to work with a qualified professional to create the contract, the promissory note and other documents for any of the different types of seller financing choices potentially available to a buyer.
What Are Ways to Reduce Risk?
Lending institutions are in a better position to handle the risks associated with offering home loans. Individuals choosing to help finance a home sale can face the possibility of delayed payments, changing financial circumstances of a buyer or a buyer defaulting on a loan. This may be a reason why the majority of sellers go the conventional route and work with buyers approved for a home loan or able to make a cash offer.
With this being said, there are a few methods some sellers use to reduce their risks when offering seller financing. A seller can:
- Require a down payment. This means that a buyer has put some of their own funds into establishing initial equity and will be less likely to default.
- Secure the home with a loan. This option allows the seller to foreclose if the buyer should default on the loan.
- Permit seller approval of the finances of the buyer. The sales contract should include terms that are contingent with the seller's approval of the financial documents of the buyer.
- Make a loan application mandatory. The buyer will need to complete a loan application form with the buyer having to verify the information provided.
In taking these steps a seller can feel confident about working with a buyer and learning more about the ability of a buyer to pay off the loan.
What Are a Few Benefits for Sellers?
There are reasons why some sellers prefer seller financing or owner financing. A seller has the potential to close on a home faster without the typical mortgage process. In the case where a buyer does default, the seller retains the house, any money paid and the down payment. A seller may also use this transaction to earn better rates than with other investment options. A seller can also avoid having to make costly repairs that may be required by traditional lenders. Seller financing is better choice for those in the financial position to absorb potential risks and who can take on the responsibilities of vetting a chosen buyer.
What Are Some Considerations for Buyers?
With seller financing, Green Valley home buyers often need to pay higher interest rates than found with a traditional lender and are often subject to balloon payments after a period of five years. Seller financing is helpful for those looking to buy their first home but individuals new to the requirements of this type of transaction may want to learn more about what to expect with the process and payment schedule.