What is Seller Financing? - Real Estate Tips
Investopedia defines Seller Financing as, “... a real estate agreement in which the seller handles the mortgage process instead of a financial institution. Instead of applying for a conventional bank mortgage, the buyer signs a mortgage with the seller.”
It is also sometimes called owner financing or a purchase-money mortgage agreement. Should you consider seller financing when buying or selling a home? What is involved in seller financing? Let’s take a closer look.
Why Should I Consider Seller Financing?
Seller financing can be a viable option for both buyers and sellers for a number of reasons. Primarily, in markets where financing is difficult, this alternative form of credit can be helpful. Both parties can avoid certain extra costs at closing and other related expenses. Some benefits and drawbacks are listed below.
Seller benefits from owner financing can include:
- Saving considerable closing costs
- Possibility of significant savings on capital gains tax
- Faster sale turnaround
- The option to sell property as-is without needing repairs
- Freedom from property tax and homeowners insurance
- Freedom from maintenance expenses
- Option to sell the owner-financed mortgage to another investor
Sellers aren’t the only ones who can benefit from owner/seller financing. Buyers can enjoy some benefits, too, including:
- Greater access to financing for low-income buyers
- Lower closing costs
- More flexible agreement terms
- Possibility of no private mortgage insurance costs
- More accessible if a buyer has poor credit
Seller Financing Disadvantages
Of course, seller financing has some disadvantages as well as benefits for both the buyer and seller. These can include:
- Few regulations to protect buyers and sellers
- Buyers can still lose the home to foreclosure if the seller doesn’t make their own mortgage payments on the property
- The buyer can end up paying too much for the property
- In most cases, higher interest rates and a bigger down payment are required
- The seller assumes certain risks if the buyer defaults on payment
What is Involved in Seller Financing?
Since a bank or other financial institution isn’t involved in the seller financing transaction, things can be simpler. However, both parties should be fully aware of the possible risks they are undertaking, and do everything possible to mitigate those risks. Written and notarized contracts are a minimum requirement. You are still making a purchase agreement for thousands of dollars.
Both parties should agree on the terms and conditions of a contract, spelling out everything possible about the transaction. This should include:
- Total purchase price
- Monthly payment amounts and due dates
- Provisions for late payments and fees
- Interest rate
- Any related tax provisions/agreements
- Required down payment amount and method of payment
- Any as-is agreement or repair-before-sale stipulations
- If the seller owes a mortgage on the property and the written permission from the mortgage holder for the transaction, if required.
- Conditions that incur loan default and provisions for handling it
Once these and any other conditions are agreed upon, both parties and a notary witness can draw up the documents and execute the sale. Transfers of funds should happen as agreed as soon as possible.
Do I Need a Realtor If I’m Involved in Seller Financing a Home?
It is recommended that both buyer and seller consult with a seasoned real estate professional like a Jeff Cook Real Estate local expert who is experienced in seller financing and home transactions. They can provide valuable advice to protect each party and to help ensure that the deal meets everyone’s needs and any legal requirements in your state and/or area. You may also want an experienced real estate attorney to actually create the seller financing contract and any other related paperwork.
Contact Jeff Cook Real Estate today to learn more about the possibilities of seller financing your home in Charleston, Columbia, Greenville, Rock Hill, Charlotte, and Myrtle Beach.