And buyers can benefit from less stringent qualifying and down payment requirements, more flexible interest rates, and better loan terms on a home that otherwise might be out of their reach. That's because the deal is not without legal, financial, and logistical hurdles. But by taking the right precautions and getting professional help, sellers can reduce the inherent risks.
In seller financing, the seller takes on the role of the lender. Instead of giving cash to the buyer, the seller extends enough credit to the buyer for the purchase price of the home, minus any down payment. The buyer and seller sign a promissory note which contains the terms of the loan. They record a mortgage or "deed of trust" in some states with the local public records authority. Then the buyer pays back the loan over time, typically with interest. These loans are often short term—for example, amortized over 30 years but with a balloon payment due in five years.
The theory is that, within a few years, the home will have gained enough in value or the buyers' financial situation will have improved enough that they can refinance with a traditional lender. From the seller's standpoint, the short time period is also practical. Sellers can't count on having the same life expectancy as a mortgage lending institution, nor the patience to wait around for 30 years until the loan is paid off. In addition, sellers don't want to be exposed to the risks of extending credit longer than necessary.
A seller is in the best position to offer a seller financing deal when the home is free and clear of a mortgage—that is, when the seller's own mortgage is paid off or can, at least, be paid off using the buyer's down payment. If the seller still has a sizable mortgage on the property, the seller's existing lender must agree to the transaction. In a tight credit market, risk-averse lenders are rarely willing to take on that extra risk.
All-inclusive mortgage. In an all-inclusive mortgage or all-inclusive trust deed AITD , the seller carries the promissory note and mortgage for the entire balance of the home price, less any down payment. Junior mortgage. Sellers can potentially extend credit to buyers to make up the difference: The seller can carry a second or "junior" mortgage for the balance of the purchase price, less any down payment.
In this case, the seller immediately gets the proceeds from the first mortgage from the buyer's first mortgage lender. However, the seller's risk in carrying a second mortgage is that he or she accepts a lower priority should the borrower default. In a foreclosure or repossession, the seller's second, or junior, mortgage is paid only after the first mortgage lender is paid off and only if there are sufficient proceeds from the sale. Best Of. Types of Mortages. Mortgage Basics. More from. Mortgage Broker Vs.
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Table of Contents Expand. What Is Owner Financing? How Does Owner Financing Work? Pros and Cons for Buyers. Pros and Cons for Sellers. Finding Owner-Financed Homes.
The Bottom Line. For sellers, owner financing provides a faster way to close because buyers can skip the lengthy mortgage process. Another perk for sellers is that they may be able to sell the home as-is, which allows them to pocket more money from the sale.
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