Are you considering seller financing your home? If so, you have likely been told some misconceptions about seller financing. To help you gain a better understanding of seller financing, I’ve debunked some of the most common seller financing myths.
Myth #1: The Seller Must Own the Property Free and Clear
It’s true that having no existing debt on a property can be beneficial to the seller. However, it’s not a requirement for seller financing. In actuality, most seller-financed transactions have prior debt incurred by the seller. For sellers who did not completely pay off their mortgage prior to selling their home, the mortgage becomes known as a Wraparound Mortgage or All Inclusive Trust Deed. When a buyer purchases the property, he/she makes payments to the seller. Meanwhile, the seller must continue making payments to their lender.
Myth #2: The Seller Must Act as the Bank
With a seller-financed property, the seller acts as the bank and collects payments from the buyer. However, if the seller does not wish to assume the risk of acting as a bank, he/she can sell the mortgage note to a secondary loan acquisition firm that specializes in buying mortgage notes. By doing this, the borrower makes the payments on the loan to the note buying firm, and the firm assumes all the risk. Sellers will receive an ample return on their investment up front, which can be used to pay off a Wraparound Mortgage, purchase a new home or vehicle, pay unexpected medical bills, and so forth.
Myth #3: The Seller Can’t Get Cash at Closing
Here is another common misconception about seller financing. A seller can get cash at closing even if he/she finances the sale. Carrying a mortgage note is very flexible if the property is in a good equity position. By seller financing and creating a mortgage note, a seller can usually sell the property faster and then sell the note to a note buying firm for immediate cash.