Seller Financing - Making a Comeback - By: Leslie Eskildsen
If you are selling your home and your existing mortgage is already paid off, and you don't require the proceeds of the sale all at once, then you may consider financing the sale yourself.
Unlike when investing in a fluctuating market, holding the loan on a mortgage assures you of a predetermined interest rate. Now that banks have started tightening their lending criteria, some prospective homeowners are finding it more difficult to obtaining mortgages and seller financing solves the problem. In addition to the investment benefit, homeowners find that offering to take back the mortgage gives them a sellers advantage in this tight buyers market.
Generally, the seller and the buyer come up with a mutually agreeable arrangement that outlines the payment, deposit and payment schedule, without the benefit of bank involvement. Instead of financing the entire mortgage amount, the seller may consider taking a loan on a portion of it. Often times, people want to buy, but the banks won't give them the amount they require. These types of loans are often short term and at a fairly high rate of interest.
It's common for banks to request at least 20 percent down, or the borrower will have to agree to pay for private mortgage insurance. This adds an extra charge of up to half a percentage point to the mortgage. Generally the individual seller requires only a minimum 10 percent down payment, but it is to the buyers advantage to put down as much as possible.
Interest rates in a seller financing arrangement are generally a few points above market rates because the lender is taking on the risk, especially if a buyer is pursuing this avenue of financing because of rejection from a bank or other lender. During the bargaining process, sellers who normally would have to settle for a lower than desired price for their home, can instead offer a slightly lower interest rate in return for the original asking price.
There are two common types of financing used with most vendor loans – a purchase money mortgage or an installment contract. With a purchase money mortgage, the seller pretty much plays the role of the bank. They receive a cash down payment from the buyer, then proceed to take back the mortgage on the remainder of the balance. The buyer gets a deed and title to the property, and commits to making monthly payments on interest and principal.
Installment contracts are generally held for shorter terms and the deed and title are not handed over until the amount is paid in full. The buyer lives in the home, paying off the interest in regular installments over the length of the contract with the balance due when the loan matures. In most cases owner held mortgages have shorter terms of five to seven years and finish with a balloon payment.
Since there are no banks involved, it is critical that the buyer does his research with regard to uncovering any tax liens, or claims that could affect property transfer. Also important are a current property appraisal, credit report and background check for both parties. If the buyer defaults, then the owner must go through the process of foreclosure or eviction before they eventually retain original title again.
When a buyer is applying for an owner held mortgage, they should provide the same financial documentation that they would if applying for a loan at a bank. The seller will need a good real estate attorney, realtor and possibly an accountant overseeing the transaction.
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