And as a seller, closing a deal on your home can be difficult if borrowers are having trouble getting approved for loans. Wouldn't it be great if you could take out the middle man and find another way to complete the transaction? Seller financing is just what it sounds like. Instead of the buyer getting a loan from the bank, the person selling the house lends the buyer the money for the purchase. The buyer and seller execute a promissory note providing an interest rate, repayment schedule and consequences of default. The buyer sends his monthly mortgage payments to the seller, who gets to earn interest on the loan, perhaps at a higher rate than he could get elsewhere. If the seller chooses to sell the loan, the buyer will send the monthly mortgage payments to the investor who purchases the loan. Seller financing arrangements are often for a short term, such as five years, with a balloon payment due at the end. The idea is that the buyer will be able to refinance before then. Of course, arrangements like this can seriously backfire if you're not careful. If you're a seller, your first objection to this arrangement might be, "But I don't have the money to lend to a buyer!" Your second objection might be, "I don't want to become a lender. It's too risky." Another reason why seller financing is not that common is because most sellers need the full proceeds from the sale of their home to purchase their next home.
Why Would a Seller Offer Financing?
A home seller might be willing to offer financing for a number of reasons:
• to minimize carrying costs while waiting to find the perfect buyer and get a deal done quickly
• to distinguish the property from other listings and get it sold faster, especially in a down market
• to increase the possibility of garnering the home's full asking price
• to get a down payment to buy another property
• to pay down debt
• to ditch the monthly expense associated with owning the house
In other words, seller financing doesn't just benefit buyers who don't qualify for (or don't want) traditional financing. It also benefits sellers, especially those who are particularly motivated to sell their homes.
Making It Happen
If seller financing appeals to you as a home seller, how do you make it happen?
• Add It to the Listing
As a seller, you can offer seller financing in your listing. Simply adding three words to your listing "Seller Financing Available" will alert potential buyers and their agents of the unique option you are offering.
• Make the Information Available
When potential buyers view your home, you can leave out an information sheet describing in detail the terms of the seller financing you are offering. It might also be a good idea to describe what seller financing is, since many buyers will be unfamiliar with it.
• Create a Comfortable Situation
The seller will want to know why a buyer couldn't qualify for a mortgage elsewhere, but is still credit-worthy. A potential buyer might have good credit and a good down payment, but may have just started a new business and cannot qualify for a loan for two years. Likewise, sellers must paint a picture to make the buyer comfortable with the arrangement. They should thoroughly explain to the buyer what seller financing is, how it works and why the buyer should consider it.
Because seller financing is uncommon, the buyer and seller would be wise to each consult financial and legal experts who understand how it works before entering into such a transaction. These experts should look out for their clients' best interests and guide them through the process.
Bottom Line
There's more than one way to buy or sell a house. Just because your financial situation is a little more complex than traditional lenders prefer doesn't mean you can't buy. And just because banks aren't approving borrowers easily doesn't mean you can't sell your house quickly - and for what it's worth. Seller financing might be just the solution you've been looking for.
And as a seller, closing a deal on your home can be difficult if borrowers are having trouble getting approved for loans. Wouldn't it be great if you could take out the middle man and find another way to complete the transaction? Seller financing is just what it sounds like. Instead of the buyer getting a loan from the bank, the person selling the house lends the buyer the money for the purchase. The buyer and seller execute a promissory note providing an interest rate, repayment schedule and consequences of default. The buyer sends his monthly mortgage payments to the seller, who gets to earn interest on the loan, perhaps at a higher rate than he could get elsewhere. If the seller chooses to sell the loan, the buyer will send the monthly mortgage payments to the investor who purchases the loan. Seller financing arrangements are often for a short term, such as five years, with a balloon payment due at the end. The idea is that the buyer will be able to refinance before then. Of course, arrangements like this can seriously backfire if you're not careful. If you're a seller, your first objection to this arrangement might be, "But I don't have the money to lend to a buyer!" Your second objection might be, "I don't want to become a lender. It's too risky." Another reason why seller financing is not that common is because most sellers need the full proceeds from the sale of their home to purchase their next home.
Why Would a Seller Offer Financing?
A home seller might be willing to offer financing for a number of reasons:
• to minimize carrying costs while waiting to find the perfect buyer and get a deal done quickly
• to distinguish the property from other listings and get it sold faster, especially in a down market
• to increase the possibility of garnering the home's full asking price
• to get a down payment to buy another property
• to pay down debt
• to ditch the monthly expense associated with owning the house
In other words, seller financing doesn't just benefit buyers who don't qualify for (or don't want) traditional financing. It also benefits sellers, especially those who are particularly motivated to sell their homes.
Making It Happen
If seller financing appeals to you as a home seller, how do you make it happen?
• Add It to the Listing
As a seller, you can offer seller financing in your listing. Simply adding three words to your listing "Seller Financing Available" will alert potential buyers and their agents of the unique option you are offering.
• Make the Information Available
When potential buyers view your home, you can leave out an information sheet describing in detail the terms of the seller financing you are offering. It might also be a good idea to describe what seller financing is, since many buyers will be unfamiliar with it.
• Create a Comfortable Situation
The seller will want to know why a buyer couldn't qualify for a mortgage elsewhere, but is still credit-worthy. A potential buyer might have good credit and a good down payment, but may have just started a new business and cannot qualify for a loan for two years. Likewise, sellers must paint a picture to make the buyer comfortable with the arrangement. They should thoroughly explain to the buyer what seller financing is, how it works and why the buyer should consider it.
Because seller financing is uncommon, the buyer and seller would be wise to each consult financial and legal experts who understand how it works before entering into such a transaction. These experts should look out for their clients' best interests and guide them through the process.
Bottom Line
There's more than one way to buy or sell a house. Just because your financial situation is a little more complex than traditional lenders prefer doesn't mean you can't buy. And just because banks aren't approving borrowers easily doesn't mean you can't sell your house quickly - and for what it's worth. Seller financing might be just the solution you've been looking for.