Buying a Home Through Seller Financing

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Buying a Home Through Seller Financing

Though this is not very common, if a particular home strikes your fancy and you have no other way to pay for it, the seller of the home could finance it for you. This is not without risks, however.

Because the legalities and tax issues can be complicated, parties interested in seller financing often enlist the help of attorneys, tax advisors, and sometimes loan servicers.

How it works

In seller financing, the seller extends credit to the buyer for the balance of the home, and the buyer begins making payments. The loan is typically spelled out in a promissory note and includes the terms of the loan—interest, monthly payments, penalties, etc. The loan is also registered with the local government.

Loans vary in length and can be amortized over a period as long as 30 years to keep the monthly payment low. That does not mean that the seller will want to wait 30 years to unload the home. That’s why many of these loans have balloon payments due in a few years. By that time, enough equity may have built up that the buyer can go to a traditional lender to refinance the loan.

Types of seller financing

Several forms of seller financing exist:

• Land contract. The buyer makes payments to the seller and receives title only after the last payment. Until that last payment, the buyer has what’s called equitable title to the property.
• Lease. The seller leases the home to the buyer for a certain term, then sells it to the buyer at some point after that. Based on the contract, the lease payments may be credited to the home’s purchase price.
• All-inclusive trust deed (or all-inclusive mortgage). In this form, the seller carries the mortgage and the promissory note until the home is paid off, then signs it over to the buyer.
• Second mortgage. If the buyer has less than a 20% down payment, traditional lenders may not want to finance. The seller, therefore, can step in and provide a small loan to make up the difference.

Strategic considerations

The buyer and seller can fill out the traditional paperwork associated with mortgage loans—a loan application, credit check, employment check, a sales contract, appraisal, mortgage contract, etc. This helps protect both of them in the event of adverse circumstances.

Requiring a down payment also works in the favor of both parties. Buyers feel more committed to the home, and sellers reduce their risk of loss.

Another advantage is that commissions and various fees can be omitted, thus putting more funds into the hands of the buyer. Seller financing deals can also be more negotiable than those from a bank; the interest rate, down payment amount, and other aspects can be less strict.