real estate

Some home sellers will lend to buyers

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.

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