There is more than one way to finance a property. While conventional mortgages are popular, they are often not easily accessible or the best choice. A standard mortgage product requires a specific down payment, interest rate, and credit score. If you consider the FHA guidelines, you can become eligible for a loan with a credit score of 580 or 600. However, the reality is different.
It’s a competitive world out there, and you can’t do without an excellent credit score and a reasonable down payment. Expect to pay down 10%-20% for your house if you want attractive interest rates. In many cases, it’s not possible to improve your credit score. You might not have enough savings to put together a high down payment. In that case, you need to look at alternative financing options.
One such choice is seller financing. As the name applies, the homeowner decides to act as the lender. As the seller, you extend enough credit so that the buyer can purchase your home. The situation benefits the buyer as they can now buy a home. It’s an option that might not have been available otherwise.
How Seller Financing Benefits Sellers?
Banks make money by lending money for an interest rate. You can do the same. It’s a little different situation, as in the end, you will be selling your home.
Sell as-is: Perhaps the first advantage is that you don’t need a home inspection or other documentation required by a conventional bank. You can choose to sell your home in its current condition. Of course, the buyer can choose to have a home inspection, but that’s not a mandatory requirement.
Lump-Sum: You can sell the promissory note to an investor, and that immediately gives you access to a lump sum of money.
Sell your house fast: Owner financing is an attractive option for homebuyers who can’t qualify for a conventional housing loan. By eliminating a traditional bank, you’re speeding up the entire process, and the deal can be closed quickly.
You have the control: If the buyer defaults, you get to keep the house as well as the down payment, and other installments paid so far.
What are the Challenges?
Seller financing can get you some profit in the form of interest rate, but that doesn’t come without effort. You need to screen potential buyers and ensure that your buyer can pay back the loan in time. If the buyer defaults and they don’t leave the house, you’ll have to enforce the contract by using a foreclosure process.
Even experienced banks dread the thought of foreclosing a house because of the legal complexities involved. Most owner financing deals are structured such that balloon payment is due in like five years. It’s thought that five years are enough to build the credit score. During this time, the buyer can arrange the funds for a better down payment. The homebuyer can qualify for a conventional mortgage. However, if it doesn’t happen; you’ll need to use the foreclosure process.
In some areas, a balloon payment may not be allowed. Make sure to consult a qualified real estate attorney before you agree. The same advice is valid for homebuyers.
For owner financing to work correctly, the house must be clear & free. There is a “due-on-sale” clause. The full mortgage amount becomes due as soon as the sale is initiated. The lenders will foreclose the house if the loan isn’t paid in full. If you’re a buyer, please talk to a reputable real estate attorney and discuss your options. You can also contact us to see which choices are available to you.