RISING TREND: SELLER FINANCING GAINS MOMENTUM IN REAL ESTATE

What Is Seller Financing?
The practice of seller financing goes by many names, including purchase-money mortgages and owner financing. But in its simplest terms, it describes a form of real estate lending transaction in which a property owner also serves as a mortgage lender. This unique situation in the home selling process eliminates the need for a financial institution to handle financing agreements and negotiations.

Seller financing is championed by some property owners and real estate pros as a way to help home buyers qualify for additional mortgage opportunities, reduce the amount of red tape associated with home sales and improve profit margins on lending. But while seller financing effectively sees a seller provide a buyer with direct financing, it also comes with pros and cons attached, as with any nontraditional mortgage option. Noting this, it’s important to do your research and consult with a qualified professional before entering into a seller financing agreement.

The Basics
A key factor that helps to make seller financing an option is if a homeseller has either no loan, or a very small loan remaining on the property to be sold. Having little or no loan on the home being sold means that more of the buyer’s down payment will go to the seller, and not diverted to the lender of a seller’s existing home loan. Most home loans now have what’s called a ‘due on sale’ clause, which means a seller’s home loan must first be paid off upon the sale of a property. The single factor of having no or little loan balance on a property is often the single most limiting condition in determining if seller financing is an option. If the property has either no loan, or only a small loan remaining, this can really open the door to seller financing. 

Playing the Bank
One other factor for prospective sellers to consider when thinking about seller financing is if they’re okay with taking payments instead of receiving a lump sum. By “playing the bank,” sellers receive payments from the buyer as they are made, not all at once. Some sellers greatly prefer the income of proceeds from their home sale over time, instead of suddenly. That said, unless the payments are made according to a ‘straight line’ amortization, there usually will be a lump sum paid to the seller at the end of the agreed upon term, often several years or much longer.

What Makes Seller Financing so Powerful
Seller financing can be very powerful. How else to describe a form of financing that can:

1. Make an otherwise ‘unsellable’ property sellable, or
2. Render an otherwise ‘unqualified’ buyer qualified, whilst escaping considerable loan fees, underwriting and requirements, like an appraisal
3. Provide income to a home seller, with interest, all secured with the protection of a legal instrument in case of default
4. Allow a homebuyer the ability to purchase a home while selling a less liquid (hard to sell) asset, or re-building credit
5. Give both buyer and seller the flexibility to negotiate what works for them, rather than a bank’s pre-determined, ‘cookie-cutter’ loan term, interest rate, or myriad of other conditions