What Is Seller Financing?

What Is Seller Financing?

Many people who are looking to sell their home might ask themselves, “what is seller financing”? Seller financing, or ‘selling on terms’, is when the home seller acts as the bank, allowing a buyer to make payments over time for the purchase of property.

Selling a home with seller financing allows buyers who cannot qualify for a traditional mortgage to purchase a home. Seller financing can be used as the primary way to finance the home purchase, or can be used in conjunction with traditional financing.

In a seller financed transaction, the terms of the loan (payment amount, interest rate, loan length, etc.) are agreed upon between the buyer and seller. The total amount financed by the seller depends on factors such as the amount of the buyer’s down payment and the presence of  any existing bank loans.

So, how does seller financing work?

Here’s an example:

An owner advertises his or her house for sale, either on her own or through an agent.

A buyer makes an offer, and they agree upon a sales price of $175,000 with a 10 percent down payment of $17,500.

Rather than requiring the buyer to obtain a bank loan, the seller carries back the balance of $157,500 in the form of a note and mortgage. It could also be a note and deed of trust or a real estate contract, depending on the customary documents for that state. A title company or real estate attorney is often used for the closing.

The note spells out the terms of repayment. In this case they agree upon 8.5 percent interest at $1,211.04 per month based on a 360-month amortization. The seller doesn’t really want to wait a full 30 years for payments, so the note requires payment in full, known as a balloon payment, within seven years.

Because the buyer is making payments to the seller rather than an institutional lender, the legal arrangement is called a private mortgage, seller carry-back, installment sale, or owner financing.

The seller has the same mortgage rights as a bank, so if the buyer does not make payments, the seller can foreclose and take the property back.

When the seller prefers cash today rather than payments over time, the rights to future payments can be sold or assigned to a note investor on the secondary market. Check out this page for examples of how this transactions work.

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