Selling a Home? How About Considering Home Seller Financing
If you’re looking to sell your home quickly or avoid the long, lengthy processes of the bank, you may want to consider offering home seller financing to prospective buyers.
What is seller financing, exactly? Put simply, it means you become the lender.
In a seller financing deal, also called owner financing, the buyer would make monthly payments to you (not a lender or bank), plus agreed-upon interest over the course of the loan term. You, as the seller, could continue this until the home and loan are paid off, or you could sell the loan in its entirety to a note buyer when you’re tired of managing payments.
Benefits of Seller or Owner Financed Homes
Owner financing homes for sale can be a great move in a slow market or if a home is in less-than-ideal condition. It can also be wise if you’re looking to sell the home quickly and without the involvement of a bank.
But, what does owner financing mean for you? All in all, home seller financing can allow you to:
1. Sell faster – With owner financing, you avoid the long, lengthy processes of banks and mortgage lenders. You can close the deal in just a few days versus a few weeks or months. If you or your potential buyers are on a tight timeline for your move, this can be a huge benefit.
2. Market to non-traditional buyers – You can also use owner financing to entice buyers who might otherwise not qualify for a loan with traditional banks and lenders – those with lower credit scores, non-W2 employees or those with a spotty employment history. This, again, can help you sell the home faster and with less hassle.
3. Keep a steady stream of income – Just as a bank would, you’ll charge interest for your seller financed home. That means an extra stream of income month after month, year after year, for as long as you hold onto the loan.
4. An owner financed property could sell at a higher price – You might be able to ask a higher listing price due to you seller financing the home. As seller financing typically allows previously shut-out buyers to purchase a home, they’re usually willing to pay premium to get what few properties they can get their hands on.
5. Enjoy tax breaks – Rather than paying a huge amount of taxes on the full-out sale of your home, owner financing means you only pay taxes on your installments – what you earned in that calendar year. This can mean less taxes paid on the property over the long haul.
6. Move a home that’s not moving – Seller financing can be a great way to get traction for a property that’s not getting any bids (either because of a slow market or the property just isn’t in great shape). Because you’re allowing buyers who might not have many other choices, offering seller financing can often help sell a slow-moving property very quickly.
Obviously, there are downsides to owner financing, too. For one, it puts you at financial risk – especially if you go out on a limb for a low-credit borrower or one without a solid debt-to-income ratio. It also means managing the loan, collecting payments, paying taxes on that income, and everything else that comes with it. Often, when handling all these tasks become too much, many owners of seller financed mortgages choose to offload them to a note buyer to eliminate the hassle.
Structuring Your Home Seller Financing Deal
Unless you plan to hold onto the mortgage for the long haul, you’ll likely want to structure your deal with note buyers in mind. Note buyers can purchase the entire mortgage off your hands and give you cash in exchange for the loan.
In order to attract a note buyer, your seller financing deal will need to be structured in such a way that:
1. Maximizes the down payment – Note buyers generally look for a down payment of at least 10%, though they prefer closer to 30% if possible. The higher the down payment, the higher you can sell a mortgage note.
2. Includes a personal guarantee – If the borrower is a corporation, trust, or entity, and not a private buyer, a note investor will most certainly want a personal guarantee on the loan. This protects the note buyer in case the borrower defaults.
3. Minimizes the loan term – Typically, note buyers look for loans that will deliver on their investment within 5 to 15 years, so stick to shorter payback terms if at all possible (even using a principal and interest structure with a balloon payment).
4. Has a significantly higher interest rate than market averages – Note buyers generally want to see an interest rate of 2 to 5% higher than the current going market rate. This means it should be somewhere in the 6 to 10% range, given today’s current rates.
5. Avoid interest-only and balloon structures – Interest-only loans with balloon payments are very risky – particularly to a note buyer. Avoid these types of structures at all costs.
A note buyer will also consider the borrower’s credit score, payment records, debt-to-income ratio and many other factors when evaluating a note. Be sure to see our full post on how to structure your mortgage note for top dollar resale for more guidance, and aim to keep your owner financed loan for at least three to six months before selling real estate notes. Any experienced note buyer will want to see positive payment performance for at least that length of time before considering a purchase.
Ready to Sell Your Seller Financed Mortgage?
If you’re considering seller financing your home to move it off the market faster, make sure to read our resources on structuring your deal and getting the most from your efforts. If you’re looking to offload a seller-financed loan you already hold, then contact us for a quote. Our agents will give you a free quote and competitive cash offer ASAP.