The Basics of Seller Financing

 

Also known as a purchase money mortgage, seller financing is when the seller agrees to "lend" money to the buyer to purchase and close on the seller's home. Usually sellers do this when money is tight, interest rates are high, or when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.

 

Seller financing differs from a traditional loan because the seller does not actually give the buyer cash to complete the purchase, as does the lender. Instead, it involves issuing a credit against the purchase price of the home. The buyer executes a promissory note or trust deed in the seller's favor.

The seller may take back a second note or finance the entire purchase if he owns the home free and clear. The buyer makes a sizeable down payment and agrees to pay the seller directly every month.

The interest rate on a purchase money note is negotiable, as are the other terms in a seller-financed transaction, and is generally influenced by current Treasury bill and certificate of deposit rates. The rate may be higher than those on conventional loans, and the length of the loan shorter, anywhere from 5 to 15 years.

 

 

The Benefits of Seller Financing

 

Seller financing is a viable option when the seller does not immediately need the entire cash equity they have accumulated in the home. In return for providing financial assistance to the buyer, the seller receives tax benefits, attracts a larger pool of potential buyers, generally completes the sale sooner, and receives good interest earnings.

 

As for the buyer, seller financing offers less rigid qualification requirements and cost savings by eliminating nearly all loan fees. Fear of default often makes many sellers reluctant to take back a second note or finance the entire purchase. A thorough credit check should help to dispel many of these fears, although the mortgage also allows the seller to foreclose on the property in case of default.

 

A seller may also require the buyer to carry hazard insurance on the property and include a due-on-sale clause, a provision in the mortgage note that allows the seller to demand full repayment if the borrower sells the property. Other financing, disclosure and repayment-term requirements will also need to be met.

 

It is a good idea to consult an attorney when entering into this type of transaction.