Very occasionally, the party that sells a home to you will lend you some of the money to make the purchase. Seller financing rarely happens because there are usually other alternatives. However, for one reason or another, it could work out that the seller provides a loan for a part or the entire amount that you borrow.
An Extra Avenue To Home Ownership
The most common terms are for five years with a balloon payment. The payments only cover the interest due and a small fraction toward the principal. The balloon payment recoups the outstanding balance for the seller at the end of the term.
As the buyer, you will most likely use a conventional loan to refinance at the end of the loan and pay off the balloon. Your equity should have grown enough in the intervening time to make bank lending a comfortable fit. Seller financing helps you buy a property that would be out of your reach.
Seller Financing Can Help To Close The Deal
Sellers will sometimes agree to provide the funding because, by offering to carry a second mortgage, they can liquidate a portion of the sale proceeds as cash. They might need the cash for a down payment on a new property or to pay off other loans and obligations. Once the deal closes and you begin making payments, the seller still has an interest in the home. They may choose to sell the loan on to someone else or hang in for the duration.
Real estate transactions are all about titles, deeds, and contracts. Organizing seller financing is a matter of paperwork as part of the closing process, in line with the real estate laws of your state. The buyer and seller exchange a promissory note that specifies the interest rate and terms. The parties agree on how to include a schedule of payments of interest and principal, and any balloon payment due at the end.
The Downside For Buyers
Although buyers gain advantages from seller financing, such as quicker closing, lower closing costs, and more flexibility about the down payment, there are still plenty of things that can keep you up at night worrying. The terms will likely include a higher interest rate; sellers have the right to sell the promissory note to a third party, and you’ll still need to prove credit worthiness. Additionally, if a bank holds a note that the seller hasn’t disclosed, you will be on the hook if the bank decides to foreclose; you need to be very confident that the seller owns the property free and clear.
Always get professional advice from your real estate agent or attorney before you sign any such agreement. Seller financing is relatively uncommon in the United States at present because of widely available institutional credit on terms and conditions that suit almost any situation. If seller financing comes up as an option, talk to your realtor or broker to find the best way to acquire the home that you want.