How Does Seller Financing Work?
Seller financing can be a good option for sellers who want to sell their home quickly, as well as for buyers who cannot get a traditional mortgage loan from a bank due to debt-to-income requirements, lack of credit scores or lack of a large down payment. Because the buyer wouldn’t ordinarily qualify for a mortgage loan, the seller can sell the home to a larger pool of property buyers and for top dollar. Buyers also benefit because they receive more flexible loan terms, requirements and possibly interest rates.
So, what exactly is seller financing and how does it work? Seller financing is essentially what it sounds like – the seller of the property helps finance the real estate transaction in order for the buyer to purchase and for the property to sell quickly. In this case, the seller is assuming the role of the bank and the borrower pays monthly payments plus interest to the seller generating a steady fixed income for the property seller. For sellers who don’t want to assume the role of the bank and be stuck with the risk of the borrower not paying, they can choose to sell the mortgage note to a note buying firm (assuming the seller structured the note properly for re-sale). The note buying firm assumes the full risk, while the note holder receives a sizeable return on their investment.
If the seller takes a mortgage on the property, the buyer signs a promissory note promising to repay the loan, as well as a mortgage or deed of trust (otherwise referred to as the security instrument), which permits the seller to foreclose on the property should the buyer fail to pay. In exchange, the seller transfers the title of the property to the buyer. Since the buyer now owns the title, he/she can choose to sell or refinance the home, but still has to make payments to the seller.
With seller financing, the terms of the loan, including the interest rate and repayment cycle, are decided by the seller and the buyer. Once the terms are agreed upon, the two parties sign a formal agreement that outlines all of the details and opens an escrow account with a title company. If you are thinking about seller-financing you home sale to a property buyer, please be sure to use a title company or attorney’s office in order to originate the loan and ensure proper procedure when closing and funding (which can/will affect the value of your note when taken to market for sale). Also, if you are seller-financing more than 1 property a year, be sure to comply with new Dodd-Frank regulations as per adding balloon payments to the loan (if you so desire).