Seller Financing: What to Know

For reference, Seller Financing is an agreement in Real Estate in which the Seller of the property handles the financing instead of a bank or other financial institution. Traditionally, a buyer would put an application in with a bank, and based on a number of factors (income, employment history, credit score, debt, etc.) you will either get approved or denied for a mortgage. Seller financing is generally for people who have the funds but something else from the required list is missing. Lets dig in:

The 4-1-1

As stated prior, a bank is not involved. The buyer/seller draw up a promissory note involving interest rate, schedule of payments, and consequences of default. The most common type of Seller Finance is a short term balloon loan. A balloon loan is where you make smaller payments for a certain amount of time and then at a certain date the balance is due. The idea is, whatever was keeping you from qualifying for a traditional loan would be fixed within 5 years or so. Even when sellers agree to regular 15 or 30 year amortized loans, they are still expecting the buyer to eventually refinance and follow the above pattern.

Pros of Seller Finance:

For the buyer, you may NOT get better terms than a traditional loan because in seller financing, the seller holds a pretty good hand, but you MAY get better terms. You will definitely have less closing costs. We recently did a seller financing deal where the buyer saved 4k in closing costs by taking advantage of the seller financing option.

For the seller, you can usually sell faster without having to make costly repairs that a bank may require for the loan. Also, the seller may be able to command a higher price since seller financing is considered a premium. 

Cons of Seller Finance:

For the buyer, you likely are going to have bring 20% to the table. Certain government programs through banks allow for as little as 3.5% and down payment assistance, so you better have been saving! Also you will have to check into if the seller is actually free and clear to sell the house. This is attained when the seller owns the house free and clear. A title search from a title company should clear this up in a jiffy. 

For the Seller, the risk of default and a messy eviction process always looms. Generally, when someone does seller financing, from the buyer side, it is because they do not meet a bank's qualifications so be prepared to interview and know extensively about your potential buyer!

In Conclusion:

Seller financing is an alternative to traditional bank loans. For buyers, if you have money saved, and believe you will be in a better position in several years to refinance, this may be a route for you. Remember you are betting on yourself. Just as the home owner will certainly look into who you are, make sure you look into who the home owner is, and not just with a title search, but background check them, find out everything you can to make sure the deal is on the up and up, and this should go without saying but look into hiring an attorney and a real estate agent.

For Sellers, Seller financing allows you to charge more for your property without really having to negotiate too much. You may not be required to make certain repairs and you, in most cases, drew pocket aces. Knowing your buyer's situation and their ability to fulfill their end is vital. Also, hire an attorney and real estate agent that have experience in this area. You will not regret it!!