Seller Financing: How It Works in Home Sales
Seller financing — when the seller gives the buyer a mortgage — can help both home buyers and sellers. Need Professional Help? Talk to a Lawyer. Zip Code: Get Started By Broderick Perkins Share on Google Plus Share on Facebook Seller financing can be a useful tool in a tight credit market. It allows sellers to move a home faster and get a sizable return on the investment. And buyers may benefit from less stringent qualifying and down payment requirements, more flexible rates, and better loan terms on a home that otherwise might be out of reach.
Sellers willing to take on the role of financier represent only a small fraction of all sellers — typically less than 10%. That’s because the deal is not without legal, financial, and logistical hurdles. But by taking the right precautions and getting professional help, sellers can reduce the inherent risks.
The Mechanics of Seller Financing In seller financing, the seller takes on the role of the lender. Instead of giving cash to the buyer, the seller extends enough credit to the buyer for the purchase price of the home, minus any down payment. The buyer and seller sign a promissory note (which contains the terms of the loan). They record a mortgage (or “deed of trust” in some states) with the local public records authority. Then the buyer pays back the loan over time, typically with interest.
These loans are often short term — for example, amortized over 30 years but with a balloon payment due in five years. The theory is that, within a few years, the home will have gained enough in value or the buyers’ financial situation will have improved enough that they can refinance with a traditional lender.
From the seller’s standpoint, the short time period is also practical — sellers can’t count on having the same life expectancy as a mortgage lending institution, nor the patience to wait around for 30 years until the loan is paid off. In addition, sellers don’t want to be exposed to the risks of extending credit longer than necessary. A seller is in the best position to offer a seller financing deal when the home is free and clear of a mortgage — that is, when the seller’s own mortgage is paid off or can, at least, be paid off using the buyer’s down payment. If the seller still has a sizable mortgage on the property, the seller’s existing lender must agree to the transaction.
In a tight credit market, risk-averse lenders are rarely willing to take on that extra risk. Types of Seller Financing Arrangements Here’s a quick look at some of the most common types of seller financing. All-inclusive mortgage. In an all-inclusive mortgage or all-inclusive trust deed (AITD), the seller carries the promissory note and mortgage for the entire balance of the home price, less any down payment. Junior mortgage. In today’s market, lenders are reluctant to finance more than 80% of a home’s value.
Sellers can potentially extend credit to buyers to make up the difference: The seller can carry a second or “junior” mortgage for the balance of the purchase price, less any down payment. In this case, the seller immediately gets the proceeds from the first mortgage from the buyer’s first mortgage lender. However, the seller’s risk in carrying a second mortgage is that he or she accepts a lower priority should the borrower default. In a foreclosure or repossession, the seller’s second, or junior, mortgage is paid only after the first mortgage lender is paid off and only if there are sufficient proceeds from the sale. Also, the bank may not agree to make a loan to someone carrying so much debt.
Land contract. Land contracts don’t pass title to the buyer, but give the buyer “equitable title,” a temporarily shared ownership. The buyer makes payments to the seller and, after the final payment, the buyer gets the deed. Lease option. The seller leases the property to the buyer for a contracted term, like an ordinary rental — except that the seller also agrees, in return for an upfront fee, to sell the property to the buyer within some specified time in the future, at agreed-upon terms (possibly including price). Some or all of the rental payments can be credited against the purchase price. Numerous variations exist on lease options.
Assumable mortgage. Assumable mortgages allow the buyer to take the seller’s place on the existing mortgage. Some FHA and VA loans, as well as conventional adjustable mortgage rate (ARM) loans, are assumable — with the bank’s approval. Getting Professional Help Both the buyer and seller will likely need an attorney or a real estate agent — perhaps both — or some other qualified professional experienced in seller financing and home transactions to write up the contract for the sale of the property, the promissory note, and any other necessary paperwork. In addition, reporting and paying taxes on a seller-financed deal can be complicated. The seller may need a financial or tax expert to provide advice and… Learn more click below
Published on Jun 26, 2014 Timing is critical when buying a new home while selling your old one. Learning whether you can afford to carry both mortgages simultaneously will help determine how the process needs to play out. In most cases, buyers need to plan for living accommodations should the old home sell before finding and closing on the new home. Key Takeaways • If the old home sells before the new home closes, buyers can choose to stay with relatives temporarily, find a short-term rental property or negotiate a rent-back period with the buyers of the old home. • If the new and old homes are scheduled to close on the same day, it’s important to let your lender know ahead of time. • Work with your lender and real estate agent to determine key dates and deadlines to ensure one transaction doesn’t hold up the other. Videos are for informational purposes only and represent the opinions of the speakers. Chase does not warrant the completeness, timeliness or accuracy of the content. ______________________________________________________ VIDEO TRANSCRIPT Jenny: This is our second home. So our first house we lived in for… Eric: Seven years. Jenny: Yeah, seven years. Eric: We kind of out grew the house. Amy: If a homeowner is in the process of wanting to sell their home, and then purchase another property, the first thing I do of course is tell them talk to your lender because they need to determine and figure out are they able to purchase without selling. Most aren’t willing or able to do that. Jenny: We had two options: we could find the new house and move into a new house or we could we were thinking about finding a place rent for a few months. Until we found the right house. Eric: And then we found this house. Called a realtor to make it happen. Amy: So we just got busy. We started figuring out what their house would sell for. Jenny: We had to get our old house ready. Kinda had to, we had a lot of stuff. Amy: I think I also had a stager meet them to just go room by room and boss them around a little bit. Telling them how to get the house ready to sell. Just de-cluttering. Putting things into storage. Doing any minor repairs or maintenance work at the house that needed to be done. Eric: To sell the house there was a few bumps you could say. We actually sold our house four days prior to us buying this house. Greg: There is nothing more stressful then a consumer or anybody that’s selling a home and on the same day they’re having to close on their new home. I call that stacked. You know, there stacked transactions. Amy: Clients get very nervous when they start to talk about the realities of how do they make that happen. How is the timing going to work? Greg: We do our very best to stay on top of our closings where if we’re ten day out from that closing, and especially if it’s a stacked closing like that, we’re going to do all hands on deck. Eric: In working with the finance guy also helped us determining when was the last day we could get paperwork in. They were willing to kind of speed things up. Amy: And they were just wonderful. They worked so hard. They did everything right and that’s really important when you’re trying to get your house ready to put on the market.