8/15/2011 12:31 PM ET|
Is seller financing right for you?
It's a tough market out there, and helping buyers with financing could be the difference between selling your house and waiting. Here, from the seller's point of view, are pros and cons.
Buyers are skittish, lenders are stingy and appraisers can be downright picky. Whether you are trying to buy a home or sell one, it's a tough market out there, so perhaps it's time to consider "seller financing," a technique that can help buyer and seller overcome obstacles to a deal.
Seller financing is just what it sounds like. Instead of getting a lump sum when the sale closes, the seller accepts the buyer's promissory note covering terms such as the loan rate, the years the loan will be in effect, the monthly payment and so forth.
While seller financing can work well for both parties, they need to study the terms closely and be sure they clearly understand them. What follows are the basics, as well as the pros and cons from the seller's point of view.
In many seller-financed deals, the seller provides the only financing the buyer needs to purchase the property. Some sellers demand a cash down payment; others will finance the entire purchase.
In other cases, the seller provides the buyer with a deal to cover just a down payment, with the buyer using an ordinary mortgage for the bulk of the purchase price. This makes it possible to sell to a buyer who cannot afford the down payment required by an ordinary lender. In these deals, the buyer's ordinary mortgage lender typically demands that the seller's loan be subordinate to the lender's. In a foreclosure, the mortgage lender must get all it is owed before the seller/financer gets anything.
Seller financing has a number of benefits for sellers: The property purchase may be made sooner than it would have been otherwise, and the seller may be able to set a loan rate higher than if he or she cashed out and put the sale proceeds in an interest-bearing account. Today, a seller might get upward of 5%, far more than one could earn with bank savings.
But there are downsides, too. Instead of getting a lump sum, the seller gets a string of payments for a number of years. The interest earnings might seem generous at the start, but would be disappointing if prevailing rates were to rise.
Many sellers minimize this risk by demanding a balloon payment a number of years down the road. For example, monthly payments could be calculated with an amortization schedule of 30 years, but the balloon payment would actually retire the debt after only five years. Typically, the parties assume the buyer will be able to refinance the loan to cover the balloon payment.
Another seller's consideration: A seller-financed deal would not provide the seller with cash to buy another property. If the seller then needed to borrow for a new home, lenders might consider income from the seller-financed deal to be too uncertain to count toward the loan qualification.
A seller who finances a home deal also would have to chase down the borrower for any missed payments, and someday might face the hassle and expense of foreclosing. In the worst case, the borrower might let the property deteriorate, or market prices could fall, leaving the seller to foreclose on a property worth less than when the deal was closed. It is critical, then, for the seller to carefully assess the buyer's creditworthiness.
Here are some other considerations for sellers:
- If the seller still has a sizable mortgage, the seller's lender will have to sign off on the deal. Seller financing is most common when the seller owns the property free and clear or owes an amount that can be paid off with the buyer's down payment.
- The seller should require a thorough loan application from the buyer and check out the buyer's assets, income sources, credit history, employment and references. Be sure to get a complete list of the buyer's other debts.
- Each party should hire a real-estate lawyer and tax adviser to go through the paperwork. The contract should be clear about the seller's rights should the buyer fall behind in payments. Typically, a title company is used to close the deal.
- To make life easier, the seller should consider hiring a loan-servicing company to collect payments, maintain an escrow account for taxes and insurance and deal with the buyer. A typical fee is $15 for each monthly payment, $30 if the servicer also manages an escrow account.
As another payment option in the increasingly limited world of home financing, buyers and sellers may find that this arrangement opens new doors to the deal.
This article was reported by Jeff Brown for MainStreet.
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As with any business dealing, it has risk and requires knowledge and skill. I probably wouldn't suggest it for someone who isn't used to running a business or taking on other risky ventures, because those skills might be required if things go awry... But to someone who wants to make more money if you get educated on how it all works, it can be a really good move.
A thing of the past --- maybe --- if congress has it's way. The Dodd-???? act is basically doing away with seller financing due to congress (AGAIN) not thinking through their acts. In the present act which is trying to keep the financial institutions in line --- unless they are to big to fail, of course --- the new hoops someone wishing to fiance their or part of their own sale are ridiculous. Once part even says that if the financier (home owner, etc.) does not properly qualify the buyer, then the buyer is off the hook (up to a THREE YEAR window). Also should you have more than one property to fiance, then there are even more hoops and COSTS (of course) in order to sell your own property. Let's either go back to what government originally was to be (military, roads, etc.) or at least make the legislators (any politician) personally liable for their acts when they "do harm" just to make political ends.
To the person who said "If you don't have 3.5% down, you can't afford the house" - this is not true. We're in an area where home values are high. 3.5% of $500,000 is $17,500. Just because I can't dump close to $20K into a house for the next 30 years, doesn't mean I can't afford the mortgage. Fortunately, we bought when we could a loan for 100% of the value, and we'll never be in danger of foreclosure because we have a nice savings for emergencies, something we wouldn't have if we would have had to pay that 3.5% down. And don't bother responding about home equity loans if you need cash - the house lost value and we will be underwater for awhile. If we'd made that down payment, it would have disappeared. We'll stay here, make our payments and likely pay off 80% of the load before we ever sell, but we're proud homeowners because we could borrow as much as we did. While the 100% loans may have added to the mortgage crisis, the bigger problems were:
- people borrowing more than they could afford to pay assuming that the house would gain value and they could refinance
- people borrowing at greatly reduced rate via ARMs that they then couldn't refinance because of the decreased value in their homes
- people borrowing with bad credit and the banks rolling those mortgages into investments along with borrowers with good credit.
Most people who buy a home want to own something they can be responsible for and make their own - not to mishandle and lose. But
If a buyer had loan worthy credit, they could get a loan through a lending institution with as little as 3.5% down. If a person cannot afford a down payment of 3.5%, they shouldn't be buying your home. This is how the mortgage crisis happened in the first place. People buying homes they cannot afford. People getting into homes they have not put a down payment on... It is very easy to walk away from a home when you haven't personally invested one penny! There is no easy way out of your house, but to wait it out for a real buyer! There are some tax advantages to offer owner carried contracts in some States, but I peronally would only do that for a stellar buyer, and a fat down payment... Be careful!
NEVER finance a buyer EVER!!!! I could have sued my buyer, but you can't squeeze blood from a turnip.
All mortgage contracts have a "Due on Sale Clause"... It prevents the Seller from selling their loan to an unqualified buyer... If they do so, the entire purchase price of the property, becomes immediately due! There is no easy way out...
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