What is Seller financing?
Seller financing, aka owner financing, is when the seller is acting as a bank on your behalf. You are not needing to qualify for a loan traditionally done by a banking institution.
How much money do I need to put down in Seller Financing?
That depends on what is agreeable to both the buyer and the seller. Normally the seller wants more down and the buyer wants to pay less. In traditional financing when an investor buys a home he or she would typically put down 20% of the purchase price. Because of this many times in Seller Financing they also want 20% down. However, it can be more or less depending upon the parties, the location, and the value of the home.
What interest rates should I expect to pay?
Again, like the down payment that can vary dramatically. This rate is typically a few percentage points higher than what you could get through conventional banks. Expect to pay at least 2 - 3 percentage points higher at a minimum.
Interest rates have been as low as 5 or 6% and can go as high as 12% or more.
How long is the seller willing to carry the loan?
This is yet another item that can vary dramatically. Unlike banks a seller is not typically in for the long haul. With traditional lending you can expect to get a 30 year amortized loan with no balloon payment nor a pre-payment penalty.
However, with Seller Financing the seller doesn't want to wait thirty years to get paid. Typically, they may give you a 30 year amortized loan but may have a 5 - 10 year balloon payment.
What is this "Balloon Payment"?
A balloon payment is a payment that at some point in the future (before the full term of the loan) that the remaining principle balance will be due.
It is best to point this out in a mathematical example. Let's say you get a 30 year (i.e., 360 month) amortized loan
from a seller. Yet she puts in a 5 year (i.e., 60 month) balloon payment. You would be making your payments based
on that 30 year loan. However, on the 60th month you will be paying your normal payment PLUS the remaining loan balance.
What ii I don't have the cash on hand to pay off the Balloon Payment?
That is a very good question. And you must be very aware of that upcoming payment. When you are getting close there are many things that you can do.
- Refinance the property into conventional financing. Assuming your home has gone up in value (or even remained the same) you still have at least a 20% equity position (from your original down payment plus principle reduction payments). There should be no problem getting a loan. You may even can get cash out if your loan that you get is greater than the payoff of the original loan.
- You sell the home to another party. Thereby cashing out your loan (paying off the Seller Financing), and giving you the cash value of the difference. Also note you will have some closing costs due to the sell of your home which may include agent commissions, escrow and title fees, and local taxes.
- Renegotiate your contract with the person who owns the note for the Seller Financing (usually the previous owner).
Why would a seller want to do Seller Financing?
There are numerous reasons why someone would do this. First of all they are getting paid monthly interest payments without having to be a landlord fixing toilets at night or on holidays. They are simply the bank. Other reasons could be for tax reasons. This type of financing is called an Installment Loan. Thereby they are not paying taxes on the home until the property is paid off in full. This is great for retirees who may be put into a higher tax bracket if they sell at the wrong time.
What does my credit have to look like to qualify for one of these?
Usually your credit is not an issue. You could have serious damages to your credit and that normally doesn't matter. The seller is receiving your Down Payment which is on the order of 20%. As long as you can show you can make the monthly payment credit is not an issue.
Do I have to live in the home to do Seller Financing?
No. However that should be disclosed up front.
What is Owner Financing and how is it different from Seller Financing?
These two terms are considered the same and are used interchangeably. However, I personally do not like the term "Owner Financing".
It is because I am a stickler to words. If the seller sells the home to you and you are now on title then technically you are the owner. And if using the words correctly would be you are financing you. This is just a play on words and doesn't really mean much, yet I do like to have clarity on words.
When the owner does Seller Financing does he or she have to own the home "free and clear"?
The answer to that is actually No. They can have other financing on the home. Thus, when they sell the home to you their mortgage stays in place. Your loan is added to the title as a secondary position note. There are two terms that represent this scenario.
In the western US this is called an AITD (All Inclusive Trust Deed). In the eastern and southern US it is more commonly called a Wrap Around Mortgage. Your loan is wrapped around their loan. Thus, when you eventually sell or refinance then all loans will be paid off. If you refinanced your new conventional loan will now be in the first position.
Why would a buyer want to do Seller Financing? What are the advantages?
The buyer gets to get into a home without having to qualify for traditional financing. Plus, credit is not an issue. If the buyer has a foreclosure, IRS tax lien, short sale, bankruptcy, etc. on their credit then so what?
Also, many investors like to do and often prefer Seller Financing. They may be spending more to get into a home for an investment yet they don't have to worry about having too many loans on their credit report.
Does Seller Financing help to improve my credit?
No. I have never seen a seller reporting to the credit repositories. This does not go on your credit. This is also why many investors like Seller Financing is because it does not restrict them to how many homes they can buy this way.
Where do I find owners who are willing to do Seller Financing?
You can see our list of homes by clicking here. Also, the founder Kevin Dunlap is a Nevada REALTOR and can assist you. If you are going through the owners directly make sure you are using licensed title companies or real estate attorneys.
Don't do this on your own and if an owner is saying to avoid these licensed people in order to save fees and money then that person may be running a con on you. Avoid shortcuts, especially when real estate is concerned.