With seller financing transactions, it’s up to the buyers and the sellers to come up with the terms of the financial agreement between both parties, Often, these terms can be negotiated, but here is an overview of what details you’ll need to consider:
THE LOAN TERM
The loan term refers to the length of time that it will take the buyers to repay the loan. Usually, this length of time falls anywhere between five and thirty years, but it can be any length of time that you see fit.
Typically, buyers like longer loan terms because that keeps their monthly payments lower. Sellers, on the other hand, don’t want to wait a long time for their investments to pay off, so they tend to prefer shorter loan terms, with or without a balloon payment.
THE BALLOON PAYMENT
A balloon payment isn’t a requirement for owner financing homes, but they are commonly used. With balloon payments, the buyer makes fixed monthly payments for a short period of time, usually a few years, before making a large, lump-sum payment to pay off the remainder of the loan.
It’s up to the buyers to determine how they want to finance that lump-sum payment, but it usually happens via pulling from savings, refinancing the loan, or selling the property.
THE DOWN PAYMENT
A down payment is an amount of money that the buyers use to indicate their interest in buying the property. They give this money to the sellers upfront as a “good faith deposit” toward buying the home. The remainder of the purchase price after the down payment is what gets financed.
Typically, down payments range anywhere between 3%-20% of the home’s purchase price. However, with owner financing, it is not uncommon to see larger down payments used as an incentive for the sellers to accept the alternative financing arrangement.
THE INTEREST RATE
The interest rates on rates on seller-financed properties are also typically higher than you might see with a bank loan. In most cases, it’s because the sellers are taking on some risk in financing the property and the higher interest rate is meant as compensation. With that in mind, it’s not uncommon to see interest rates ranging from 4%-10%.
However, in addition to the interest rate itself, you also have to decide how the interest will accrue. Here is an overview of your options:
With a fixed-rate loan, both the interest rate and the principal loan amount stay the same over the life of the loan. Many buyers and sellers prefer this type of loan because it is easier to keep track of for accounting purposes and it means that the buyers are able to predict their monthly payments.
ADJUSTABLE LOAN RATE
With this type of loan a low, introductory interest rate is offered for a few years. However, after that introductory-rate period is up, the interest rate adjusts periodically.
When using an interest-only loan, the buyer only makes payments on the interest that accrues from the loan for a set period of time. Then, a balloon payment is made in order to pay off the principal loan amount.