Everything You Should Know About Seller Financing


A Smart Option In A Tight Mortgage Market

If you’re buying a home, you may come across huge obstacles when trying to finance through a traditional bank or mortgage company, since mortgage lending standards have become much stricter. One way to avoid these hurdles is by using seller financing. Sellers can approve whomever they want, no matter what and on their own terms, by handling the loan personally. This can be a big advantage to both buyers and sellers who are seeking a successful transaction without having to deal with a bank holding up the deal. To help you understand more about seller financing, here is a short guide laying out some of the important facts: SEE ALSO: Must Know Facts For Mortgage & Refinancing

Good Option For Buyers With Limited Choices

As mentioned above, seller financing is a good alternative for buyers having difficulties qualifying for a mortgage loan due to exacting underwriting standards, or buyers currently having trouble meeting the purchase price. In order to take full advantage of this loan option, however, buyers should understand both the benefits and drawbacks.

Buyers Have Many Advantages

When a seller personally finances the loan, it eliminates all the bank fees, appraisal charges, and mortgage closing costs buyers usually have to pay. Buyers may also request a lease-to-own arrangement that lets them apply monthly rent toward a down payment, with an option to buy in the future, negotiating down the terms until it is agreeable to both parties.

Why Buyers Should Beware

The most common pitfall for buyers is that they tend to overpay on the home price or the interest rate, since sellers can set whatever payments they want. Buyers need to also be wary if the seller does not have complete ownership of the home and the bank decides to foreclose for not paying off the mortgage. In this case, not only does the buyer’s investment go to waste, they must now also find a new place to live.

An Investment Possibility For Sellers

Luckily, buyers are not the only ones who will benefit from using seller financing. Sellers may actually end up getting more for their home by agreeing to finance the loan. But, again, sellers should be aware of the advantages and the pitfalls first, in order to achieve the best transaction.

Sellers Can Make More Profit

Through seller financing, a seller isn't restricted in the terms they can ask for on the house. In exchange for the service and convenience of personally handling the loan, the seller can:
  • Ask for a higher sale price
  • Charge additional interest on the loan
  • Request a larger down payment
  • Sell property “as is,” eliminating the need for repair costs
Seller financing is also advantageous for a seller when a home does not appraise high enough to satisfy mortgage lenders, forcing the house to stay on the market without any buyers. Additionally, sellers may be taxed less by receiving monthly payment installments rather than a huge lump sum.

Sellers Should Take Caution

Like buyers, sellers must also be cautious when entering into a seller financing deal. If a seller has not completely paid off their loan, for example, the bank can force them to pay off the existing mortgage in full if the property is sold to someone else. There is also the possibility of foreclosure or abandonment if the buyer can’t come up with the monthly payments or chooses to abandon the house.

Take Steps To Avoid Any Problems

A good way to sidestep these risks is for both parties to consult with qualified real estate agents or attorneys before signing any kind of seller financing contract. These professionals can help you draw up a fair contract as well as provide expert advice on legal and financial areas. Sellers should also verify a buyer’s finances before agreeing to bankroll them personally. After all, if a buyer couldn't qualify for a loan from a bank or lender, there must be a good reason. SEE ALSO: How To Renege On A Home Purchase Contract Seller financing isn't ideal for everyone, but if you’re a seller with a house that’s been on the market for ages, or a buyer having trouble getting a loan, it might be the perfect option for you. Just make sure you understand all the risks and pitfalls that can come up, and take all the necessary steps to prevent them.
Date of original publication:
Updated on: November 10, 2015

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