Financing Your Home Without The Bank?

Over past few years, in the midst of the unpredictable housing market, an interesting paradox has, on occasion, reared its ugly head.  A motivated seller is ready to sell - and a willing and (for the most part) able buyer is hankering to buy - yet lacks the necessary financial instrument to consummate the deal.

Without having the full amount under the mattress, some buyers are finding themselves having difficulty getting approval from lenders with the more restrictive terms. Perhaps the potential owners are on the margin - relatively low risk but with a less than perfect credit score, or they don’t have the funds for a down payment. There are others who have cash in the bank, good jobs, pay their bills on time, but found themselves underwater in their home (or business). It may have been just one uncontrollable event that forced letting the property go. Buyers who fall into any of these groups may be just what that seller needed. There is a not-so-well-known lending option available termed Owner or Seller Financing. Seller financing could provide a bridge, giving somewhat less qualified buyers a chance to buy now and transition into a traditional mortgage later.

What is Seller Financing?

In simplified terms, seller financing is when the owner finances the purchase of the home for the buyer and essentially acts as the bank. It’s most successful and more common when the home has no mortgage and the owner doesn’t need to immediately receive the money for the sale of the home. Seller financing has its benefits, as well as its risks. Full information and fact finding is key for both parties.

A Win-Win Transaction

There are solid reasons why a seller might also benefit from this creative arrangement, aside from expanding the buyer pool. If a property is not selling under conventional methods, offering owner financing is one way to stand apart from the rest and move a not-so-easy-to-sell property.

Because the seller is offering owner financing, he or she may be in a position to command full list price or perhaps even higher. The seller might pay less in taxes, reporting only the income received in each calendar year. Interest rates are still very low - this can make seller financing more attractive to property owners, especially those who aren't reinvesting in more real estate but are looking for income producing investments. Banks offer less than 2% interest. If a buyer comes along and offers 4%, that could be engaging for the right seller.

Options and Benefits

Unlike standard loans, buyers and sellers can choose from a variety of payment arrangements such as interest only, fixed-rate, balloon payments, etc. Interest rates can adjust periodically or remain at one rate for the term of the loan. Down payments are negotiable. Sometimes sellers will let a buyer make periodic lump-sum payments toward a down payment.

Without an institutional lender, say good-bye to the additional discount points, origination fees, processing fees, administration fees or any of the other assorted ‘miscellaneous’ fees that lenders like to add to your HUD.   

Because buyers and sellers aren't waiting on a lender to process the financing, buyers can close faster and get buyer possession earlier over a conventional loan transaction.

Temper the Risks

The seller financing option is not without risk. Both sides need to do their homework before signing the dotted line. The seller is taking on the buyer as a lender, therefore he or she should research the buyer as rigorously as any bank would, including reviewing the potential buyer’s credit as well as employment history. The seller must make sure the buyer will be able to pay the mortgage. Protections are necessary for the buyer also. They need to ensure the home is legally owned by the owner and know if the home is owned outright or if there’s a mortgage or other liens on the home. Long and short, it’s advisable to utilize the assistance of an experienced Realtor and hire a lawyer familiar with this type of real estate financing.

If you have more questions about seller financing options, or to find out what your home is worth today, send an email to me at JMVeegh@cox.net or give me a ring at 401-847-8818.

All the Best!

Jeannie Veegh
East Shore Properties