Seller-financing isn’t a very common method by which people sell their houses. The reason for this is that it can be very complex. However, despite the complexity surrounding seller-financed home sales, there are many more advantages to this method than more traditional methods.
A seller-financed home sale does not involve a bank. The buyer and seller make the arrangements themselves, which is done by drawing up a promissory note, outlining the interest rate, payment schedule, and consequences of the buyer defaults.
If you want to learn more about seller-financed home sales, then you’re in the right place. Here’s everything you should know:
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Alternative Methods
Before you consider financing your property’s sale, you might want to consider other methods. There are alternative methods available to you. You don’t always have to work with a bank. If you are interested in selling a house fast in Charlotte, NC, then you could sell to the city’s premier home-buying companies.
Home buying companies are businesses that buy houses from private individuals, paying the market price or just below it. The best part about working with home buying companies is that you don’t have to pay for a realtor’s help nor do you need to fund a conveyancer to transfer your property’s deed to its new owner.
Seller Financing
Moving away from an effective alternative to seller financing, and to seller financing, this article will first explain what it really is. House sales can be very expensive. In fact, they are often the largest purchases people ever make.
Because of the cost associated with buying or selling a house, there is usually some type of financing involved. Seller financing is when the buyer finances a property purchase directly through the property’s seller, rather than going to a mortgage lender, bank, or building association.
How Does It Work?
When a seller agrees to finance their property’s sale, they don’t hand over any money, as a bank or mortgage lender would. Instead, the seller gives the buyer enough credit to cover the price of their home– meaning that the buyer essentially just pays until the amount owed is paid in full.
More often than not, sellers will ask for a deposit, though because seller financing often takes place between friends and family members, they don’t always. These kinds of lending arrangements usually take place over a period of many years, much in the same way that a traditional mortgage would.
Payment Period
As already mentioned, these kinds of arrangements aren’t usually short-term. Instead, they take place over a long period of time. The most common type of seller financing arrangement is a 30-year period.
This allows the buyer to keep their mortgage payments low, though they can overpay or pay in full early should they want to. The exact period depends largely upon the seller. If they want their money sooner, then they will set up a shorter payment arrangement, and ask for higher monthly payments.
Mortgage Agreement
Seller financing usually takes place with a view to the buyer eventually being able to take out a mortgage on the property that they are buying. For example, after a period of, say, 10 years has passed, then they will have enough equity in the house for them to be able to take out a traditional mortgage.
This allows the person selling their house to get their entire payout quickly. With that said, this isn’t always the case. Sometimes people view seller financing as somewhat like taking out a retirement policy. They use the monthly payments received to fund their old age.
Promissory Note
When the sale takes place, the seller will ask the buyer to sign a promissory note. This is a protective measure to ensure that the buyer does not default. The promissory note will detail all of the terms of the loan, including the exact interest rate, consequences of default, and repayment schedule.
In some cases, the property’s owner will retain the title to the house until the loan is fully paid off. This is to prevent the buyer from defaulting. With that said, this can be risky for buyers and is not a popular choice.
Pros and Cons
Pros include faster closing, cheaper closing, flexible payments, and that seller-financing serves as a method for people that can’t get traditional financing to secure a property.
By closing faster, it means that the buyer doesn’t have to wait for a conveyancer or underwriter to approve their application. Cheaper closing means that there are no bank fees or appraisal costs.
A flexible down payment allows people that don’t have enough money for a deposit the ability to still secure a house. Finally, not everybody can get a mortgage, so the ability to get a house despite not being able to get traditional financing makes buying a house possible for people without good credit.
Cons include higher interest, seller approval, due-on-sale clauses, and balloon payments.
Higher interest is very common with this type of house sale, because of the flexible terms and convenience for buyers, sellers typically charge more interest than a bank would, in order to make it worth their while.
Additionally, seller financing is very hard to find, meaning that you need their approval explicitly, and there aren’t many people that want to give people that option. A due-on-sale clause is when a seller demands immediate payment of a debt in full. With seller financing, due-on-sale clauses are also added, so that the seller can demand all of the money at once if payments are missed.
These tend to be strictly enforced. This can result in the house being seized or taken back. Balloon payments are large payments, usually due after a period of time. With seller financing, balloon payments are usually owed after 10 years. If you aren’t able to pay the balloon payment, then the property’s seller could demand their house back, and you could lose your equity in it, as well as the house itself.
Seller financing can be good if you find the right person. If you want to go ahead with a seller-financed house purchase then make sure that you carefully read the seller’s stipulations. If the seller is a friend or loved one, then you might be able to negotiate with them to agree to more favorable terms.
