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.
