Seller financing can be a very useful tool in bringing buyers and sellers together to close a deal. Also called owner financing, it can be extremely beneficial to both parties given the proper circumstances. Not only used by the late-night info-commercial creating-wealth-with-no-money-down genre, seller financing is also a very viable mainstream option to help sell real estate.
As a second mortgage, seller financing has typically been used to bridge the dollar gap for a home buyer between the amount of the first mortgage and the down payment that he or she has available. It has also been used as wraparound financing (new financing that wraps around existing financing). But seller financing can also be used in the first lien position. This is more common of large parcels of bare land that conventional lenders have traditionally not financed.
The Benefits of Seller Financing
So, what are the benefits of seller financing? Some of the major advantages include a substantial savings in closing costs for both buyer and seller. The parties also negotiate the interest rate and the repayment schedule, as well as other conditions of the loan. The buyer can request special conditions of the purchase, such as the inclusion of household appliances or even vehicles. Also, the borrower does not have to qualify with a loan underwriter. And, unless negotiated, there are no PMI insurance premiums.
On the seller’s side, he or she will receive a much higher yield on their investment by receiving their equity with interest. The seller could also negotiate a significantly higher interest rate than could be received on other types of investments. A higher selling price is usually obtained as compensation for assisting the buyer with financing. The property could be sold “as is”, thus eliminating the need for costly repairs that conventional lenders would require. The seller screens the buyer for credit-worthiness and the ability to pay, and could also require the buyer to purchase a PMI policy to protect the seller against default. The seller could also choose which security document (mortgage, deed of trust, land sales document, etc.) to best secure his or her interest until the loan is paid.
Seller Financing Disadvantages
Are there any disadvantages? Of course there are. But mostly on the buyer’s side. For one, the buyer could pay the loan in full but still not receive title due to other encumbrances not divulged by or unknown to the seller. The buyer could make payments faithfully, but the seller might not make payments on any senior financing that may be in place, thus subjecting the property to foreclosure. Also, the buyer may not have the protection of a home inspection, mortgage insurance, or an appraisal to ensure that he or she is not paying too much for the property. Of course, all of these problems can be eliminated by negotiating the outcomes into the transaction.
In short, a seller-financed sale can be good, as long as it is good for both parties. The concerns of buyer and seller must be addressed during negotiations. But with a “meeting of the minds”, it can certainly be a win-win situation for all concerned. One big advantage to using the iSellerFINANCE platform is that as a seller, you get to use the proprietary credit scoring engine, iSellerCREDIT which will enable the seller to see a much more comprehensive buyer credit profile than that reported by the big 3 credit bureaus.