How To Use Seller Financing
Buying a house was relatively easy in the 1980s thanks to the creative financing options concocted by that era’s mortgage lenders. Today, however, many of those options no longer exist. Lenders have returned to their traditional methods of determining a borrower’s creditworthiness. Less-than-sterling credit can make it difficult to obtain a conventional mortgage loan.
But having a few blemishes on your credit history doesn’t mean you have to do without financing. It just means you probably won’t find a traditional lender willing to extend a loan. You have other options. For example, you can pursue selling financing, where the owner of a listed property lends you the money to purchase it.
Below, we’ll explain the nuts and bolts of this type of arrangement. You’ll also learn about some of its pros and cons, as well as when it might prove beneficial to both parties.
Basics Of Seller Financing: How It Works
A traditional mortgage loan is obtained from a bank, credit union, or specialized mortgage lender. The lender agrees to lend you a specific sum of money and you agree to pay it back via monthly payments with interest.
Owner financing works in a similar manner. The individual selling the property agrees to lend a specific sum to the borrower to finance the home’s purchase. The borrower – i.e. the home’s new owner – agrees to make monthly payments with interest to the seller until the loan’s balance is paid off or sold to another company.
Such an arrangement can last for 30 years, similar to a conventional mortgage loan. More commonly, however, such loans are retired or sold off within 5 years.
Reasons To Use Seller Financing To Buy A Home
Buyers enjoy a number of advantages when purchasing a house with seller financing. For example, those who have poor credit may be unable to secure traditional loans. They can work directly with sellers to arrange financing terms – e.g interest rate, loan duration, amount of the down payment, etc. – that are acceptable to all parties.
Also, banks and other conventional lenders typically impose hefty closing costs. When you arrange seller financing, you can avoid such costs, including processing fees, appraisal fees, and various other bank-related expenses.
You might also be able to negotiate a smaller down payment. If the owner is motivated to sell, he or she might be willing to forgo a down payment altogether.
In most cases, the owner of the listed property won’t report the loan to the credit bureaus. That means you may be able to obtain other loans that might otherwise be unavailable to you.
Potential Downsides To Owner Financing (For Buyers)
Sellers will only agree to finance the purchase of their homes if doing so represents their best option for allocating their funds. That being the case, expect to pay a higher interest rate than is currently being offered by bank savings accounts, money market accounts, and index funds.
It’s also worth noting that sellers take on risk by financing buyers. Buyers may fail to make the agreed-upon monthly payments to the seller. Sellers can choose to foreclose on the property, much like a traditional lender, if that happens.
Situations That Call For Owner Financing
Some circumstances are ideally suited for seller financing. For example, consider a seller who doesn’t need the proceeds from the sale of her home to purchase another home. In a buyer’s market, she might find it easier to sell her home if she offers to finance its purchase.
Consider a scenario in which a buyer has obtained a traditional mortgage loan, but needs a little more cash – e.g. $25,000 – in order to buy a specific property. The seller may be willing to finance the small amount over 5 years, at which point the buyer agrees to pay it off in its entirety.
A seller carrying two mortgages might want to lower her monthly expenses. She may be willing to sell one of her properties and finance the buyer’s purchase.
Buying a home with owner financing still strikes many buyers and sellers as a novel idea. Because most people are unfamiliar with the option, they’re less inclined to pursue it. If you’re in the market for a new home, ask your realtor whether this type of arrangement makes sense for you and your family.