Seller Financing has been around for years even before banks were lending money out to business or individuals. Back in the day if someone owned a piece of property and someone else wanted to buy it they would agree on terms and sell it on a handshake. Today the structure is pretty much the same where the seller acts as the bank and now carries back a contract.
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.
What are the types of owner financing?
- Mortgage/deed of trust:
In this case, the seller carries a mortgage note for an amount equal to the difference between purchase price and the down payment. The seller charges interest on the balance. Or, the buyer takes a first mortgage loan against the home and gives the seller a second note for the balance of the purchase price less the down payment plus the first mortgage loan.
- Contract for Deed/Land Contract:
Land contracts or Contracts for Deed can be a way of financing your home purchase through owner financing. Typically, a land contract or a contract for deed is the contract that evidences your intent to purchase the home. In this case, you (buyer) and the current owner sign a contract for a deed but the title does not pass to the buyer until the final payment has been made or the agreement is refinanced.
- Lease Purchase Agreement:
This is an agreement where the seller leases the property to the buyer for a certain term. At the end of the lease, the buyer takes out a mortgage to pay down the balance of the purchase price less the total rent payments made.
Reasons for owner financing for the buyer
- You do not qualify for a traditional loan:
- You may have poor credit due to late payments, collections, or even bankruptcy.
- You are self-employed or have a new job, cannot prove your income.
- You cannot afford to pay closing costs.
- You need to get into the home fast.
Reasons for owner financing for the Seller
- Owners can move a property more quickly;
- A seller can often get a better return on his/her investment than other assets would generate;
- A house becomes more attractive to buyers if they don’t have to worry about obtaining financing.
- Set the terms you want.
- The property is one that conventional lenders will not finance
- Higher sales price - because the seller is offering owner financing, the seller may be in a position to command full list price or higher
- Tax breaks - the seller might pay less in taxes on an installment sale, reporting only the income received in each calendar year
- Monthly income - payments from a buyer increase the seller's monthly cash flow, resulting in spendable income
- Higher interest rate - owner financing can carry a higher rate of interest than a seller might receive in a money market account or other low-risk types of investments
- Shorter listing term - owner financing attracts a different set of buyers. If a property is not selling under conventional methods, offering owner financing is one way to stand out from the sea of inventory and move a hard-to-sell property that otherwise might not sell
- Eliminate repair costs - the property could be sold 'as is," eliminating the need for costly repairs that conventional lenders would require:
- Substantial savings in closing costs
- Attract a larger number of interested buyers
For everyone involved Buyer, Seller & Realtor:
- The deal can close more quickly;
- A sale means one less vacant house in the neighborhood, which enhances the value of the home and the neighborhood;
- It keeps a house out of foreclosure, which is expensive and can take up to a year to complete.
- Stimulate interest in your home for sale.