Buying Real Estate with Seller Financing

by Nationwide Secured Capital

In the early 2000’s, banks granted many loans to so many people who could not afford the houses they were purchasing. Looking back now, one could clearly see that a family of four making $45,000 would not be able to afford a $300,000 house. Yet, lending requirements were loose and cases such as this were common. After the market crash of 2007, banks tightened their requirements and it became harder for people to get a loan.

The purchase of owning your own home as always been the American dream. Saving money from each and every paycheck towards the down payment is possible but to save for the whole payment of a house, it is not realistic for many people. If one does have cash for the outright purchase of a house, sometimes having cash has more benefits than a loan. A lower purchase price might be negotiated with the seller, and many times the sale will close quickly with cash.

Another option in buying a house if one does not have all the cash and one does not want to go to a bank for a loan or has been turned down by a bank for a loan, is to use seller financing. Seller financing is when the seller of the house acts like the bank. That is, the seller is the one who agrees to provide the loan to the buyer. The agreement will still include all the terms that a bank provides such as interest rate, and monthly payment. This agreement that secures the loan is called a promissory note.

Promissory notes are written promises to pay a sum of money to the specified bearer at a certain future time. It may include interest rates with length of time to fulfill the promise. The property is the security of the loan. It is signed by both parties.

The seller benefits in that he/she will receive monthly income with interest. The income is passive with no obligation for the seller to now take care of the property to include repairs, taxes, and insurance. And just as bank can foreclose on a property should the buyer stop making payments, so can the seller.

When the seller no longer wants the burden of holding the note, he/she can sell the note to another party receiving a lump sum for the purchase and responsibility of that property/note.

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Whether you are looking to sell a house without the hassles of going through a traditional bank, a note is very viable option for all parties involved.

HOW TO DOCUMENT YOUR NOTE AND LOAN FOR MAXIMUM VALUE

by Nationwide Secured Capital

Once you and your buyer have agreed on terms for the loan, it needs to be documented properly and legally as part of the sale of your property.
New federal loan regulations known as Dodd-Frank began in 2014 and requires that you make a good-faith effort to confirm that the borrower can afford to pay back the loan you are giving them. The best way to do this is by requiring your borrower to fill completely out a 1003 Loan Application – just like a bank would do. They must list ALL of their debts and income, and assets – in general, the total of their monthly payments for all debts (including this new mortgage) should be less than 40% of their monthly income.

If you have specified a balloon in your loan terms, it is also very important to review their assets and their credit, to assure that borrower has sufficient assets to pay the balloon when it comes due (e.g. they have another house they are selling which has sufficient equity to pay off your loan) OR their credit history is strong enough to expect that they can refinance the balloon balance by the time it comes due.

The easiest way to make sure you have complied with these new federal loan regulations is to use a Licensed Mortgage Originator in the area of the property. Failure to comply with the regulations and to obtain income, asset and debt information from your borrower creates risk and reduces the value of your loan.

If you are transferring the Deed for property – you MUST insist on a promissory note AND a proper security document (Deed of Trust is preferable, or Mortgage is required in some states) – with a lender’s title insurance policy that insures that title has been completely and properly transferred to the new owner. The security document must be recorded during the sale and transfer of the property.

If your are keeping the Deed for the property until the borrower has paid off the loan, this is known as a Contract for Deed, Real Estate Contract or Land Contract. There are some advantages to this structure for you as a seller in case the loan is not paid – but these are considerably harder to sell and value is less than a conventional property loan – and are now illegal or cannot receive title insurance in some states. A title company in the area of the property can advise you.

It is generally advisable to have a promissory note signed along with the contract (And the contract should be recorded) and to also complete the title search, and obtain lender’s title insurance- this assures that you can properly and legally transfer the property to the buyer when their loan is paid off.

The Promissory Note is a critical document. It should state all of the following:

  • Payee – who is making the loan and will receive the payments
  • Maker(s) – persons responsible for making the payments
  • Interest Rate
  • Date on which interest begins
  • Frequency of Payments
  • Amount of each payment
  • Date when first payment is due
  • Maturity date (or Balloon Date)
  • Grace period – when is payment late, and late fee due – amount of fee
  • Default Rate – if payments are not made, and a default is declared, what Interest Rate will be charged (if not the original rate)
  • Reference to the type of security document that secures repayment of the loan

The Security document (Deed of Trust, Mortgage, or Contract) is the second critical document for your loan that pledges the property as collateral that can be foreclosed in case of non-payment of the loan. This is a lengthier document that spells out the other obligations of the loan, and what happens in case of non-payment. Some states also commonly use a “short form” deed of trust that references the long document with all the general provisions that was recorded previously and can be used in all loans and incorporated by reference. It is very important that the Security document is thorough and complete. Some frequent areas of mistake that should be checked are:

  • Reference to the Promissory note and date
  • Correct and complete identification of the property securing the Note
  • Correct identification of the Mortgagor (the buyer paying the loan)
  • Correct identification of the Mortgagee (the seller giving the loan)
  • Requirement for Buyer to make payments prescribed under the note, and pay taxes and insurance, and to name you as lien holder on the insurance for the property
  • Requirement for Buyer to pay all amounts due that are necessary to protect the property against other liens that can come ahead of the loan (e.g. assessments, condo fees, association dues in some locations)
  • Property Insurance Naming you as the Lien holder/Mortgagee – this is a VERY important part of the loan package that is often overlooked – and protects you and assures you will receive full value for the loan you gave borrower to buy your property. If the buildings burn down — and your are not named as Lien holder, on their insurance coverage — the borrower can receive the insurance payment directly and can walk away from the property and your loan — all you receive is the empty land/ compromised building.

You must also be named on the policy with your CURRENT notification address in order to receive notice of any non-renewal of the policy. If the borrower drops his insurance, and the property burns down, you have even less possibility to be paid off for your loan. If he borrower changes insurance companies, you also need to be notified of the lapse of old policy so you can require them to provide you a copy of the new insurance – and again you make sure that you are named as Lien holder.
While you can save a few dollars and “do it yourself” for these necessary documents, there is usually a considerable sum of money you are owed, and having the loan documents done right by a title company or attorney with all the provisions above, and more, protects you and is highly recommended. Having experts assist with the loan documents can avoid a number of pitfalls — some may be impossible to fix later — if you or your buyer are the ones who draft the documentation for the loan.

 

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What you need to know if you offer owner financing

by Nationwide Secured Capital

When you’re ready to sell your house and are thinking of offering seller financing, there are some things to consider if you want to become the lender on a large financial loan.

Owner, or seller financing is just what it says it is. The buyer does not turn to a bank but instead gets a loan from the person selling the house for the purchase of that house. Owner financing can be considered for all or part of the price of the home.

There may be sellers were are not able to offer the owner financing.  Many may need the cash to purchase another home or for some other expense.  If the owner is able to sell the house using owner financing, they can set themselves apart from other listings. This is especially helpful in times of saturated markets.

Other advantages for sellers to use seller financing is that the seller can receive a better return on this investment than other investments. Owners can also move the property quickly.

The advantages for the buyer are that the financing is right in front of you. There is no need to go to an outside source and if need to, apply for a jumbo loan. The closing cost might also be covered.

Owner financing is not the traditional way to sell a house but it does not necessarily mean it should not be done.  If was more popular in the late 1970’s when interest rates often reached 18 percent. Now it is being offered as the purchase price of houses continue to rise. Along with buyers no longer qualifying for an affordable loan, the sellers can offer financing to increase the pool of potential buyers.

The buyer and the seller will create a real estate note, or a promissory note. For the note to meet the required terms to be enforceable, it must state the loan amount, interest rate, and length of the loan, any goods or services to be used as the guarantee for the debt to be paid, the date the payments are due, the amount due after the interest has been applied, and any default terms.

For the seller to offer seller financing, the money is still tied up in real estate.  This does not solve the problem if the owner wants to be clear of the house after it is sold. Money from the sale of the house will come in over a length of time and not in one lump sum.  There is always the possibility of the borrower defaulting on the loan too and seller having to go through the eviction/foreclosure process with the borrower.

The disadvantage for the buyer/borrower is that the seller may not always report to credit bureaus which with timely payments, would not improve the buyer’s credit score.

If an owner does decide to offer seller financing, make sure you seek professional advice to review all documents. Know the ramifications before you sign on the dotted line.