Borrowing from banks may be the most obvious and traditional way of financing a home purchase, but it’s not always your only option.
Many homebuyers aren’t aware that some sellers may be willing to finance the sale of their own home to get a deal done, says Dawn Rickabaugh, a broker and owner-financing consultant in Pasadena, Calif.
“Sometimes all it takes is asking,” Rickabaugh says.
Even in a buyer’s market, seller financing deals aren’t easy to find and aren’t widely advertised.
That’s because many sellers don’t consider the option or don’t know they can offer owner financing until a buyer pops the question.
Buyers opt for seller financing for various reasons. Often it’s because they don’t qualify for a traditional mortgage due to credit problems or because they are self-employed and don’t have sufficient documentation to prove their income. There are also buyers who simply don’t want to go through the hassle of dealing with a bank and investors who want to take advantage of the current housing market but have difficulty obtaining traditional financing.
Advantages of buying an owner-financed home
In a seller-financed transaction there are no closing costs such as loan origination fees, discount points and mortgage insurance premiums.
Because you won’t have to wait for bank approvals, closing can happen much quicker than with traditional financing. The buyer also may be able to negotiate better terms.
“When you’re talking seller financing, the sky is the limit,” says Rickabaugh.
You may find a seller willing to accept 5 percent or 10 percent down and offer zero-interest or low-interest financing for 10 or 30 years. But in many cases, you will come across sellers who charge 7 percent to 10 percent interest and a 20 percent down payment.
It all depends on the particular situations of the buyer and the seller.
Good terms available but harder to find
Sellers who have paid off their home, have been trying to sell for a while and are tired of carrying the costs of property taxes, insurance and maintenance, are your best bet in getting a good deal.
“My friend just bought this property in Missouri for $40,000 with zero interest through seller financing,” Rickabaugh says.
But those don’t fall from the sky.
Seller financing can be expensive
Jeff Gross, a real estate broker and an investor in Gilbert, Ariz., who specializes in seller financing, offers buyers a program that allows them to choose any home for sale and purchase it through seller financing. But that comes at a price.
Gross’ company pays cash for the home the buyer chooses, adds 20 percent to the price paid and resells it to the buyer, who then is required to put a minimum of percent 20 down and pay about 7 percent to 9 percent interest for a seven-year balloon mortgage.
The deal may sound expensive, but “it gives them the opportunity to get the house that they want now and refinance later when they qualify for a loan,” Gross says.
He says many of his clients are buyers whose credit records are tainted by a foreclosure or a short sale but want to own a home again, now that home prices have declined.
Rickabaugh says interest rates in the 7 percent to 9 percent range are common in the seller financing arena because sellers are taking a risk and want something extra for not being able to cash out on the home right away, as they would in a traditional sale.
The key is to negotiate terms that allow the buyer at least five years before the loan has to be refinanced, says attorney Gaylene Rogers Lonergan in Dallas.
Be wary of homes with mortgages
Before buying a property using seller financing, buyers need to be aware if the seller still has a mortgage on the property, Lonergan says. The title company assisting in the closing should be able to tell you if the property has a clear title, but it’s best to have an attorney involved early in the process.
Owners who still owe a balance on their mortgage can legally sell their properties in most states, Lonergan says, but most mortgage contracts give lenders the option to demand the mortgage be paid in full if the property is sold. It is known as the due-on-sale clause.
Most lenders don’t enforce the clause as long as they get paid every month, but if the lender enforces it and the buyer can’t pay off the mortgage, the buyer could lose the home, Lonergan says.
Some sellers try to get around that by not transferring the title to the new buyer. Instead, the seller takes the buyer’s payment each month and continues to make the payments on the existing mortgage. Seller and buyer sign an agreement that provides the buyer with an equitable interest in the property, but the title isn’t transferred until the loan is paid off.
Lonergan recommends staying away from homes with mortgages, but if you decide to go for it, at least hire a third party, such as a servicing company, to collect your payments and send them directly to the bank.
If the seller defaults on other debts, you would still be at risk. Creditors with judgments against the seller can try to foreclose on the home because legally, the home still belongs to the seller.
“Seller financing can be a great tool, but it has to be done right,” Lonergan says.