real estate

Will seller financing sell your home?

Most sellers prefer a loan of three to five years, though some will agree to a 10-year loan.

At the end of the loan period, it is assumed the buyers will refinance with a traditional lender to cover the balloon payment owed to the seller. The higher interest rate sellers charge is an incentive to the buyer to refinance as soon as possible.

Protecting yourself

While seller financing can be a good option for some sellers, it's important to take steps to mitigate risk.

Sellers who use seller financing continue to hold the title until the loan is paid in full. Buyers must sign a promissory note that includes all the terms of the loan agreement.

Renee Mayhall, RealEstate.com vice president and general manager of its Georgia and Carolinas region, says sellers should reduce risk by working with a Realtor who can provide protections in a written contract and assist the seller by checking the buyer’s credit, income and assets, and by verfiying employment.

"Often the buyers are self-employed or someone who has a single instance that has damaged their credit, or even international buyers who have not built up the right kind of credit in the U.S. to qualify for a traditional loan approval," Mayhall says.

Requiring a bigger down payment also can help protect sellers.

"Sellers usually require a down payment of at least 3 percent to 5 percent, but sometimes they can negotiate a bigger down payment to protect themselves," Mayhall says.

Lance Churchill, an attorney and president of Frontline Real Estate Education Group in Boise, Idaho, says all sellers also should come up with a contingency plan in case the buyers do not make their payments. Review state laws concerning foreclosure that could impact the seller's ability to evict nonpaying buyers, he says.

While not required, both sides can consult with an attorney to make sure they are protected by the contract.

"The seller takes on more risks in seller financing than the buyer, but they have the option of foreclosing on the buyer and taking the property back if necessary," Coppock says. "I always recommend that the sellers keep the down payment money as a cushion in case the buyers pay late or default on the loan."

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