HOME SELLERS ARE NOW OFFERING TO FINANCE THE SALE THEMSELVES

More home sellers are offering their own private financing at lower interest rates to try and sweeten the deal as soaring mortgage costs have caused many potential buyers to leave the housing market.

As of November, 0.43% of all U.S. active listings mentioned some type of private financing—the highest that figure has been in three years, according to an analysis provided by Realtor.com. 

The figure, while a sliver of active listings, underscores how sellers are losing the upper hand in the U.S. housing market and are now looking for ways to entice skittish house hunters. At the height of the housing boom, private financing incentives were half as common as they are today, falling to a low of less than 0.17% of all listings in June 2021, according to Realtor.com’s data. 

But whatever it says about the market, private financing has multiple upsides for a seller. With private financing, a seller may finance all or part of a loan, which is secured by the property. The buyer’s principal and interest payments go to the seller. It can be a savvy move for a seller, since offering a loan just below current mortgage rates might allow a buyer to pay more for the home itself, he noted.

As a rule of thumb, financing is most often offered by sellers who already own their home outright, and who don’t need to use the proceeds from a sale to buy another property right away. Like other financial products, the note also can be sold on a secondary market by a seller who may not wish to hold onto it indefinitely.

Owner financing or seller financing refers to an arrangement where the seller or property owner offers to finance the buyer. The seller credits the buyer enough money to cover the price of the home, excluding the down payments. Thereafter, instead of the buyer deposition money to the lender on a monthly basis, the buyer makes regular deposits to the seller until the loan is fully paid. The buyer must sign a promissory note, which lays out the details of the purchase agreement. The owner then retains ownership to the property until the buyer completes all the payments.

Such agreements often go for a short time. In reality, sellers will refrain from an agreement that ties them to the property or buyer for decades. Ideally, such agreements contain a 30-year amortization period, which includes a lump sum repayment or a balloon payment of the outstanding principle, payable in five years.

The agreement operates in the hope that the buyer will have enough equity after five years, as a result of increase in value of the property to pay the remaining amount. It also hopes that the buyers improve their financial standing, which increases their chances of accessing financing from traditional lenders.