Someone who owns a home outright and wants to sell has two options: sell the home for a lump sum or offer seller financing. Seller financing means the buyer acts as the bank and collects payments on the mortgage that would have gone to the bank.
Seller financing ultimately means more money for the seller. For example, consider a home worth $200,000. Someone can sell that home and receive around that amount.
But if sellers go with seller financing, they stand to gain more. For the same $200,000 house, if sellers offer a buyer a 6 percent interest rate and a 30-year term, sellers stand to receive $431,676 in payments.
Seller financing is also a reasonably safe investment because it has real estate as collateral. Just as with a traditional mortgage, if the buyer fails to make payments, the seller can foreclose on the property. In such a case, once sellers regain the foreclosed property, they can start the process all over again.
With interest rates increasing, seller financing is becoming more popular with buyers. This is because banks are raising the standards buyers have to meet to qualify for loans. Seller financing is helping to fill that gap.
The push-back from traditional mortgage sources makes sense. Last decade’s housing crash means that banks are restricting their lending practices. But, unfortunately, these tightening standards push millions of Americans out of the housing market.
However, private sellers can use their own standards in lending and include people who might otherwise have been unable to become homeowners.
Just because seller financing can be great for buyers, it doesn’t mean they can go into it wearing rose-colored glasses. A home purchase is one of the biggest decisions most people make in their lives and should be made carefully.
Buyers should beware homes in great need of repair or those with high interest rates. Seller financing is a great option for sellers needing to sell a home not up to FHA standards, so buyers should know the actual state of the property they’re buying.
Because the seller sets the interest rate of the private mortgage, the buyer should go in educated on what standard interest rates are and how much he is willing to spend. A 5-percentage-point difference in interest rate can translate into tens of thousands of dollars during the life of a loan.
Sellers should be equally careful in selecting buyers to extend financing to. Your goal as a seller should be to select the candidate least likely to stop paying on the loan.
That means sometimes applying the standards banks use and sometimes deviating from them. Preferably the buyer should have a reasonable amount of money to put down on the property. Buyers with thousands of their own dollars invested in a property are much less likely to simply walk away from that investment.
Though good credit makes a difference, more and more investors are paying attention to whether the buyer has solid ties to the community the home is in. Someone with fair credit but a strong desire to live in a community is likely to keep paying on the mortgage.
Some sellers go into the private mortgage process wanting a payment stream; however, others go in knowing all along they plan on selling the note to an investor. But not all notes are created equal; some qualities make a note more appealing to an investor.
A higher interest rate means more income for the investor.
A good payment history translates into less risk for the investor.
Similar to payment history, good credit involving the buyer is less risky.
These are the main factors the seller can control in the mortgage note writing process; however, it’s important to note that the investor will also consider the value of the property as well as the mortgage note’s market value at time of sale.
Once the sale is complete, many sellers choose to recruit a third-party servicing company to help with the paperwork after the sale. A servicing company acts as a middleman between seller and buyer. This can be exceptionally useful in cases where the buyer and sellers know each other: The company can ensure a professional relationship is maintained.
The servicing company takes care of collecting the payment from the buyer and delivering it to the seller. It also takes care of IRS forms and credit bureau reporting.