real estate

Will seller financing sell your home?

house and money
Highlights
  • In seller financing, the seller serves as the lender and takes the payments.
  • Sellers can reap interest payments as high as 9 percent.
  • Option may work best for homeowners without mortgages.

Can seller financing be the incentive you need to get your house sold?

In seller financing, the seller functions as a direct lender, with the buyer making monthly mortgage payments to the seller instead of a bank.

Buyers who accept seller financing usually cannot qualify for a traditional mortgage loan, often because they have a low credit score.

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"For sellers, the biggest benefit is to increase the pool of potential buyers to include those who might not qualify for a loan," says Ardina Franssen, RealEstate.com agent for the Atlanta and Lake Lanier region in Georgia.

Because borrowers with this profile are considered riskier, sellers often can charge as much as 8 percent or 9 percent in interest, which is more than many other investments earn.

In addition, taxes are owed only on the amount received each year rather than on the entire sale price. This reduces any taxes that might be owed. Sellers often are able to negotiate a higher price for the home when they offer financing.

"Seller financing can be a good investment because sellers will often be able to sell at full price and will earn a high interest rate on their funds," Franssen says. "Both sides benefit because there are reduced closing costs when no lender is involved in the transaction."

Who qualifies?

Seller financing is easier to arrange when homeowners own their property without a mortgage. In 2008, about 32 percent of all American homeowners owned their homes free and clear, according to a U.S. Census American Community Survey.

Homeowners with a small mortgage may be able to pay off that mortgage with the down payment from a buyer or other funds in order to offer seller financing.

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In most cases, seller financing covers the entire purchase other than the down payment because institutional lenders rarely approve financing for a partial loan, says Brandon Coppock, program director for Owner Finance Buyers in Dallas, a company that assists owners with seller financing.

"Most of the buyers we work with are using seller financing as bridge financing for a few years until they can qualify for a refinance," Coppock says. "In many cases, the buyers have had a short sale or some other singular event that damaged their credit rather than a pattern of not paying bills."

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