Seller Financing - Everything You Need to Know

In the real estate industry, when it comes to financing residential real estate, most people love to play it safe. We tend to follow the “normal”, traditional method. The seller finds the buyer and checks whether the buyer qualifies for a mortgage with the required income, employment history, and a good credit score. If everything goes smoothly, the lending institute puts up the money to finance the deal.  

But what  if everything isn’t perfect? Traditional financing may not be available, and yet the buyer and seller still want to proceed privately with the sale. 

The solution is known as seller financing. Real estate experts help buyers with additional mortgage opportunities, reducing the amount of red tape and improving profit margins on lending. But with lots of pros comes cons and many questions. In this article, Tall Pine Properties will try to address all the seller financing queries floating across the industry.

Definition: What is Seller Financing? 

Seller financing is a real estate agreement between the parties that allows a buyer to directly pay back the loan amount to the seller instead of using the traditional mortgage from a bank, credit union, or other financial institutions. The seller provides financing and manages the mortgage process. Seller financing cuts out the middleman and provides a loan directly to the buyer. 

In the payment process, the buyer makes the down payment of the principal amount of the property price. The remaining amount is paid to the seller through monthly payments, with some additional interest charge on the loan. 

Seller financing is risky; a small mistake can quickly elevate the risks into a crisis. Before diving into a seller financing agreement, you must do your research properly or seek out professional advice.

Need help? Looking for a qualified professional near you? Contact us today!

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Types of Seller Financing:

With only two players involved, owner financing may seem easy, quick, and cheap. Home buyers can find this attractive, especially first-time buyers. But it can be a bit tricky. Before opting for seller financing, get a complete 360-degree view of it. As owner financing agreements can be of various types, we’ve outlined some of the common ones below:

Land Contract: 

Land contracts are similar to a mortgage, but in this type of agreement, the seller retains the title to their property and transfers it only after the full payment is received. A land contract is all about borrowing money from the seller and returning it in installments or paying lump-sum amounts until the purchase price is fully paid.

Assumable Mortgage: 

This is a type of financing agreement in which it is assumed that the outstanding mortgage is transferred from the current seller to the buyer. In this process, a buyer can take over an existing mortgage instead of going through the rigorous process of obtaining a property loan from the bank.

Lease Purchase: 

Also known as a rent-to-own agreement, this type of seller financing provides the option to purchase the leased property during a specific period at an agreed amount. The rent amount is then credited to the purchase price. Under a lease-purchase agreement, renters have an opportunity to purchase the property later paying the same amount.

Land Loans: 

Sometimes called a “lot loan”, land loans are commonly used by the buyer when he needs to purchase a plot of land. This type of loan usually comes with a higher interest rate as it is taken for the empty land used to build the future property.

Holding Mortgage: 

This is a mortgage agreement in which the seller serves as lender and provides a loan to the buyer. The homeowner receives a payment every month. The twist is the seller holds the property until the full payment is received.

Pros of Seller Financing

Seller Financing Advantage for Buyer

• Easy Process: Trust is the key in a seller-driven agreement, so as long as that confidence is maintained, the procedure becomes easy and involves minimal paperwork. 
• Negotiable: Unlike with institutional lending, seller financing is always open for negotiation. The buyer can ask for flexibility on amount, interest rates and conditions. 
• Lower Cost: Without the involvement of a financial institute, buyers can save a lot on processing charges, originating charges, and admin fees. 
• Quick Closure: Seller financing is a quick process as there is no middleman involved, it requires no repetitive procedures, and demands no inspections.

Seller Financing Advantage for Seller

• No Maintenance: The homeowner can sell their home in as-is condition without investing in maintenance and costly repairs.
• Regular Income: With seller financing, the homeowner gets continuous income without worrying about property tax and maintenance expenses.
• Tax Advantage: Sellers who see significant capital gains on the property can have significant tax savings.
• Higher Return: Owner financing agreements provide a higher return over time with long-term capital gains.

Cons of Seller Financing

Seller Financing Disadvantage for Buyers

• High Interest Rate: With ease comes expense. In many cases the interest rate is very high as compared to financial institutions’ mortgage products.
• Security Risk: The buyer's money is always at risk. If the financing is not secured, the buyer can lose all the money paid including the down payment and monthly rent.
• Mix-Up: A small mistake can lead to a big disaster. The buyer must read every term in the contract and understand the legal meaning of it.

Seller Financing Disadvantage for Sellers

• Risk Management: Before locking in any deal, the seller needs to analyze the risk involved. If you aren’t totally confident in the best direction for you, consult with a qualified professional before entering into a seller financing agreement.
• Trust Error: Seller financing a game of trust; while financial institutions follow a highly specific process to qualify loan recipients. The seller must find a way to have confidence in the reliability of the buyer.  
• Repair Cost: In case of default the repair cost can be huge, inclusive of the loss suffered due to defaults on payments.

Conclusion

Seller financing can be a roller coaster ride for many people. There are different options for almost any situation! It typically works best when you are not qualified for a traditional mortgage. Owner financing can attract new buyers and meet needs for people facing huge hurdles buying their property, but not everything looking good is worth investing in. While seller financing creates promising opportunities, it involves huge risk factors. Make sure you know what you’re getting into before you sign the dotted line! 

As an alternative, try working with Tall Pine Properties! We take the risk out of the equation when you need to sell your house fast. Click here to learn more!