When it comes to financing residential property, almost every transaction follows a similar process. You find a house you wish to buy, apply for a mortgage with the necessary income, employment, and credit-related documents, and once qualified, the financial institution offers you money to close on the deal.
However, what if a different way to finance a home existed, a process that allows the buyer and seller to proceed privately with the sale?
Seller financing, also known as owner financing or purchase-money mortgages, is when the seller manages the mortgage process and finances the purchase. This unique home-selling process eliminates the need for a financial institution and acts as an efficient tool in the tight credit market. It helps sellers quickly close on a deal and secure a significant return on the investment, while buyers benefit from flexible interest rates and tenure periods and less stringent eligibility criteria and down payment requirements.
If you are looking to buy a house financed by the seller, here is everything you should know.
How Does Seller Financing Work?
Seller financing is a specific type of real estate agreement that allows the buyer to pay an initial down payment to the seller followed by monthly installments with some percent of interest charged on the loan. Meaning a bank, credit union, or other financial institution isn’t involved, and the home seller owns and oversees the debt.
If you wish to leverage seller financing, the seller will offer to finance and handle the mortgage process themselves. They will draft a promissory note, setting the interest rate, tenure period, payment schedule, and the consequences should you fail to meet the obligations.
Common Types of Seller Financing
Under this seller financing agreement, the title of ownership isn’t passed to the buyer. Instead, the buyer gets the “equitable title,” which means a temporarily shared ownership of the property. Then, at the end of the repayment period, the property’s ownership is legally transferred to the buyer.
In this type of seller financing, buyers are allowed to assume or take over a seller’s existing mortgage, particularly if it comes at a lower interest rate. A few FHA and VA loans are assumable.
Also referred to as the rent-to-own contract, lease purchase allows the buyer to lease the property for a contract by paying the seller an upfront fee. The buyer also gets the exclusive right to purchase the property at a later date.
If home sellers have an outstanding mortgage on their property, they can employ wraparound financing—they sell the home to a buyer who makes the down payment plus the monthly loan payments. The seller can then use the monthly installments to pay off their existing mortgage.
If the homebuyer fails to qualify for a traditional mortgage to pay for the entire purchase price of the home, the seller will offer them a second mortgage to make up the difference. Nonetheless, a second mortgage will always have a shorter tenure period and a higher interest rate.
Advantages Of Seller Financing
- Less Paperwork – While the seller should trust you completely before they enter into a seller financing agreement, if they do, it means less paperwork and hassle-free procedures.
- Flexible Eligibility Criteria – Unlike traditional financing options, seller financing involves more flexible agreement terms and more opportunities for low-income buyers or those with poor credit.
- Negotiable – A buyer can always negotiate with the seller on payment schedules, tenure periods, conditions, and interest rates.
- Lower Costs – The lack of institutional lenders means no processing, admin, or originating charges.
- Faster Closing – Unlike the conventional home buying process that involves using a mortgage, seller financing involves no repetitive process, inspections, bureaucracy, etc. This also helps you save on closing costs.
Disadvantages of Seller Financing
- High-Interest Rate – In most cases, the seller charges a higher interest rate than financial institutions.
- Understanding Of Terms – Often, a lot of terms associated with seller financing can be confusing. Buyers should go through and understand all the terms mentioned in the contract.
- Risk – If the buyer defaults, they can risk losing all the money paid in the down payment and monthly installments for the house.
How To Structure a Seller Financing Deal
If you are game for buying a house financed by the seller, work with a real estate agent to find properties with seller financing. In case you found a house on your own, work with the seller to find a real estate agent or attorney who can help you write and review the promissory note and sales contract and handle all other related tasks. Ensure the real estate agent is experienced in the seller financing realm and familiar with the area you live in. This will help you adhere to any relevant regulation that is specific to the jurisdiction. Furthermore, a real estate agent or attorney will help you and the seller decide on the specific clauses to be included in the agreement that better suit the unique circumstances of the sale.
The Bottom Line – How to Buy a House Financed by The Seller?
Seller financing is a great option for buyers with lower credit scores or irregular income. However, it has both upsides and downsides. For instance, though it helps you obtain loans that wouldn’t have been otherwise possible, the seller might charge a higher interest rate than a traditional mortgage lender. So, while seller financing opens more possibilities, it might not be the best option for all homebuyers.
One way to determine whether seller financing is ideal for you is by considering whether it aligns with your investment strategy. If unsure, consult a real estate agent before entering into an agreement.
Remember that many factors come into play if you choose to proceed with seller financing, such as the type of seller financing contract, the trust between the buyer and seller, and a thorough understanding of the legal requirements mentioned in the agreement. A real estate agent can help you with essential points like price, accruing interest, maturity date, date of payment, etc. Additionally, they will also help you review and draft the terms and conditions of an owner-financing contract, so you can win the best possible deal.
📞 Have Questions? Ask The Chris Eckert Real Estate Team
Give The Chris Eckert Real Estate Team a call today at 650.627.3799 to learn more about local areas, discuss selling a house, or tour available homes for sale.