Key Takeaways
- Seller financed mortgages are a nontraditional financing method for homebuyers and investors.
- There are numerous advantages of seller financing, no matter which side of the transaction you are on.
- Educate yourself on the ins and outs in order to be aware of the potential risks of seller financing.
As an investor, it will benefit you greatly to become familiar with a variety of the financing options that exist in today’s real estate world. There are a number of ways to finance a property, ranging from private money to a seller financed mortgage, and everything in between. By gaining a better understanding of what’s out there you will be better equipped to handle any deal that comes your way, no matter what side of the transaction you are on. Continue reading to learn the ins and outs of a seller financed mortgage, and how to determine when this option might be right for you.
What Is A Seller Financed Mortgage?
A seller financed mortgage allows the buyer and seller to come to an agreement directly, rather than going through a financial institution or traditional lender. This system involves the seller financing the property for the buyer, and can be mutually beneficial depending on the situation at hand. A seller financed mortgage is typically initiated by buyers looking for nontraditional financing methods, and can offer a number of perks for both parties. For example, buyers are often attracted to this form of financing because it comes with different down payment requirements and interest terms when compared to a conventional mortgage. On the other hand, seller financed mortgages can be beneficial for sellers looking to speed along the closing process and earn revenue from the property over time.
When it comes time to negotiate the terms of a seller financed mortgage, a real estate attorney can be used to oversee the process. Sellers will also usually have the buyers sign a promissory note outlining the details of the loan. This will include information on the interest rates, payment schedule and any other stipulations. According to BankRate.com, seller financing interest rates typically fall in the range of seven to nine percent. However, due to the situational nature of the setup, seller financing mortgage interest will vary depending on the agreement.
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Factors To Look Out For With Seller Financing
While not entirely uncommon, this financing strategy can be misunderstood as complicated or risky. With any form of financing, there are a number of factors to consider to ensure a smooth transaction. It is crucial to mind your due diligence and familiarize yourself with any potential obstacles that could arise. Here are a few tips to keep in mind if you’re asking yourself, “is seller financing a good idea.”
- Status Of The Property: Determining who owns the property is a crucial first step. For both buyers and sellers, whether or not the property has an existing mortgage will influence if seller financing is even a possibility. Most mortgages have a “due on sale” clause, meaning the mortgage must be paid if the property is sold. As a general rule, seller financing works best if someone owns the property free and clear.
- Terms Of The Agreement: During a seller financed mortgage, it is the parties involved determining the specifics of the loan; therefore, there are no real requirements for a minimum down payment or interest rates. These factors will, instead, be decided by the buyer and seller, meaning you need to be prepared to decide what you want.
- Who Will Be Involved: No one is expecting you to be fully equipped to figure out the details of a seller financed mortgage, which is to say you may need to work with a real estate attorney to determine the details of the agreement. This goes for both buyers and sellers, as you want to make sure the terms of the mortgage are right for both of you.
- Pay Attention To The Price: This is also important for both buyers and sellers. Pay attention to the benefits of a seller financed mortgage, but also be prepared to think critically about any potential cons. You want to find a form of financing that best aligns with your situation. Even if the benefits of a seller financed mortgage are appealing to you, you want to do your research to ensure this is a good option for you.
Seller Financing Tips (For The Seller)
A seller financed mortgage can offer a number of surprising benefits for sellers, including a quicker timeframe for the closing process and a stream of revenue during the course of the loan. Additionally, sellers may be attracted to the idea of spreading out tax payments after the property sells, instead of all at once. All in all, there are several things sellers will want to keep in mind when approached about establishing a seller financing agreement. Here are just a few tips for sellers interested in financing a property:
- Think About A Down Payment: While you may not be concerned with a large down payment, it is a good idea as a seller to require some form of down payment with a seller financed mortgage. This will ensure the buyer in question has equity in the property, and can provide you with a sense of security about the process.
- Do A Credit Check: Before moving forward with a seller financed mortgage, you will likely want to get a better understanding of the buyer’s credit history. While credit is not an end all be all measurement for someone’s financial standing it can give you a better idea of their payment history and reliability.
- Assess Affordability: You may want to check into the buyer’s current income to determine whether or not they will be able to make the payments you have agreed upon. To verify a potential buyer’s income, you can check either there pay stubs or tax returns.
- Set The Terms: A seller financed mortgage is similar to any loan, in that you will need to set terms such as the payment amount, interest rate and due date. You can agree upon these with the buyer; however, it is a good idea as a seller to have an idea of what you are looking for.
- Establish A Collection System: Let’s say you do decide to move forward with a seller financed mortgage. How do you want to collect monthly payments? You may want to employ a third party company to keep track of the payments, interest and remaining balance of the loans.
Advantages Of Seller Financing (For The Buyer)
From a buyer’s perspective, seller financing is often thought of as advantageous because it can come with milder requirements when compared to a conventional mortgage. As with anything, there are a number of pros and cons of seller financing for the buyer, all of which you will want to consider when approaching the conversation. Below are a few of the perks to a seller financed mortgage if you are a buyer.
- The Closing Process: By avoiding a traditional financial institution or lender, you can often avoid the costs associated with the closing process. For example, there will not be loan origination fees or mortgage insurance premiums to consider.
- Your Credit: If you are a buyer with a less than average credit history, seller financing may provide an opportunity to become a property owner. You may have to answer questions from your seller, but overall the credit requirements will likely be less strict.
- Down Payment: A seller financed down payment is often not as high when compared to other forms of financing. Because you will be coming to an agreement with the seller directly, you will have more of a say in what kind of down payment you are willing and able to make.
- Quicker Timeline: Another perk of working directly with the seller is that the overall closing process will often take less time when compared to a traditional mortgage. This can be a great perk for anyone itching to move in or get started on a renovation project.
How To Find Seller Financed Deals
If the idea of a seller financed mortgage is appealing to you, you may be wondering how to go about finding these deals. It’s no surprise that seller financing is not the most common option available, but that doesn’t mean it does not exist. As a buyer, you simply need to be diligent about seeking out opportunities. As a buyer, you should be prepared to initiate the conversation and be ready to highlight the ways in which it will be mutually beneficial. Seller financing is not about taking advantage of the seller, so be clear in the agreement. A great way to approach the conversation is simply by asking, so don’t be afraid to try.
Another way to find seller financed deals is to look for a few buzzwords when searching for deals. For example, you may want to look for listings that mention flexible terms in the property listing. Looking for terms like, “motivated” or “owner will carry” can be helpful, too. In some cases, you may even find sellers directly state seller financing as an option. Look for these words as you search for properties and you may find several opportunities available. Additionally, you can also search for homeowners with high equity in their properties. As I said before, these homes can make good candidates for seller financed mortgages. Don’t be afraid to ask when you find a possibility.
Summary
Seller financing can offer unique benefits for both buyers and sellers. Depending on what end of the transaction you are on, you may find this setup more appealing than a conventional mortgage or lump-sum payment. For buyers, a seller financed mortgage often means more flexible terms of the loan. Sellers, on the other hand, look forward to a quick closing process. No matter which side of the deal you are on, it will benefit you greatly to understand the process of seller financing. After all what is a seller financed mortgage if not another tool in your toolkit as an investor?
Have you ever taken part in a seller financed mortgage? Share your experience in the comments below.
