Frequently Asked Questions When The Seller Finances the Buyer
What are the Benefits of Seller Financing?
Seller financing is also know as owner financing. Owner who want to finance the sale of their house can benefit in many ways. Seller financing can be a great alternative to getting a standard mortgage loan and is favorable to the buyers perspective and he or she can start favorable financing of a home by making a small down payment (less than 20%). When home buyers avoid traditional mortgage loans with banks and other kinds of lenders, they pay fewer fees and lower closing costs. From the sellers perspective they can agree to finance a home purchase because they will benefit from using the loan as an asset and a additional source of income. In exchange for lending the buyer their mortgage that is already in place and maybe other funds, (usually in the form of equity) the seller can then increase the purchase price when needed and sell the home without fixing it up or remodeling it. All in all, a seller when making a sale properly can pocket much more money by becoming a home buyer’s lender. Also, when the seller does financing on all or part of a home purchase, the home sale can be completed on short term notice and in a little amount of time. No waiting on traditional lender qualifications, No waiting on inspections, No waiting on appraisals, and so on. This can be very advantageous to owners who want to sell their homes quickly and for buyers who don’t want to wait around for a traditional bank lender to approve them for a conventional mortgage loan.
What is the Traditional Method of Selling a House?
Most transactions follow a well-worn traditional process. The seller finds a real estate broker (pays a 6% commission at closing,) seller finds a willing buyer (pays half or 3% to Buyers Broker) with the required income, employment history and credit score to qualify for a mortgage (Seller pays additional 2% to buyers closing costs), and a lending institution qualifies buyer (if appraisal supports value) puts up the money to finance the deal.
But what if traditional financing is unavailable, and buyer and seller still want to proceed privately with the sale? The parties enter what’s known as seller financing. As the term implies, the person who’s selling the house finances the purchase, rather than the bank providing a mortgage to the buyer.
How Does The Financing Work?
It depends on how you would like it structured. Selling a house without having to qualify at a bank is a huge perk. For example an offer could look something like this from a buyer: ‘My offer is full price with 20% down, seller financing for $350,000 at 6%, amortized over 30 years with a five-year balloon. If I don’t refinance in two to three years, I will increase the rate to 7% in years four and five.’ Think about it! If the seller owes $280,000 at 3.5% on the remainder of the mortgage before selling they would be receiving all of their equity with this offer of 20% down and a additional interest rate spread of 3% for up to 5 years.
If I sell my house and carry the loan how will I qualify for another house?
The easiest way to answer that is by asking a question. What would you do if you decided to keep the house as a rental? Could you get another house? The answer is yes because you will use the rental income to qualify for another house. Its the same thing on owner financing. You can always get another house.