In today’s tight housing market, sellers and buyers are looking for alternative ways to finance home or property ownership. Seller financing can solve this problem in a big way. While most people turn to conventional loans as a way to purchase a home, seller financing can drastically reduce costs all around.
With seller financing, the owner carries all or part of the note and is in a sense, now the lender. The biggest benefit to the seller is they are more likely to get their asking price. They can also get a bigger return on their investment as the interest rate is generally higher on a seller financed loan.
While a down payment is not required, the seller should request at least 10% down to minimize the risk of extending the loan. A buyer is less likely to default if they have a substantial investment towards ownership.
Many sellers are hesitant to provide owner financing, but these loans are relatively short-term, about 5 years opposed to 30 years loans with a conventional bank. Monthly payments, interest rates, and term of the loan are negotiated between seller and buyer. While requirements are more flexible for seller financing, the seller should always maintain the right to refuse the loan to a potential buyer.
One of the most important things to consider when providing seller financing, is to have a lawyer or loan servicing company assist with drawing up the promissory note or other paperwork necessary to protect the interests of both parties. The paperwork is then filed with the state. Be sure that the terms state that the property itself is securing the loan. If the buyer defaults through nonpayment, then the seller has recourse to regain the property just like the bank would.
To help determine credit worthiness, the seller should require a loan application then verify the information provided and run a credit check. In this way, the seller can minimize the risks of providing the loan. To ensure that a fair price is being asked for, a current appraisal of the property should be made.
While there seems to be mostly benefits to the seller by providing owner financing, the buyer also gains benefits. Seller financing is easier to get approved for, there are no points to pay, no commissions, faster closing of the sale, and monthly payments could be less than a conventional loan.
Two other seller financing options available are the sale of land, and lease with option to purchase. In the case of land, the only difference is that the buyer gets the deed, rather than the title upon payment in full.
With a lease option, rent is paid monthly for a certain period of time. Then all or part of the rent payments are applied to the down payment and the owner can carry the rest of the note.
Seller financing is certainly an option to be considered, or asked for, by both owners looking to sell, and potential homeowners looking to buy.