How Does Seller Financing Work?

Posted by Greg Geilman on Monday, July 1st, 2019 at 11:06am.

What Sellers Should Know Before Choosing Seller FinancingSometimes, the best buyer needs financing but does not have the ability to secure a mortgage. In these cases, the seller might choose to personally finance the transaction. Since this represents some risk to the seller, there are many things they must do before they agree to the transaction. Solid preparation and some extra work may make a big difference. This guide helps sellers know the most important aspects of a seller-financed home sale, and how they can avoid problems throughout the process.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

What Is Seller Financing?

Seller financing is quite similar to the standard home selling process, with the seller acting as the mortgage company. In a standard transaction, a lender functions like a third party, requiring additional services and documents from buyer and seller to confirm that they are willing to lend the money. With seller financing, the seller claims that role instead.

Financing a home personally can make the process finish more quickly, but often requires a lot more work on the part of the seller. Instead of relying on the lender to vet the buyer's qualifications and arrange all the financial documents for the sale, they are responsible to complete most of these tasks themselves. They need to consider how property taxes and homeowners insurance will be paid, and set terms for their payment. Sellers who are interested in taking this route should hire a real estate agent experienced in seller financing. They may also need to hire a real estate lawyer to help prepare documents before closing.

What Are the Benefits of Seller Financing?

Even with the extra workload, there are several reasons that sellers might prefer to finance the property themselves. These include:

  • ability to set terms that work for the seller and the buyer
  • lower costs and time spent completing the sale process
  • access to a larger pool of potential buyers
  • ability to sell to an interested buyer who cannot secure traditional financing

Sellers should keep in mind that financing the buyer's purchase of the property gives them some leeway, but not complete freedom. They must still negotiate the terms with the buyer, and follow laws concerning the sale of property.

When Is Seller Financing a Practical Idea?

There are certain cases in which seller financing makes more sense than a traditional home sale. Some home sellers find themselves in a situation where a buyer with mortgage financing simply is not available. Homeowners who live in rural areas or regions where home sales are down may need to be less selective about the kinds of buyers they consider. Property owners who have a reliable tenant interested in the property could be more willing to finance the sale, since they know the tenant is good at making timely payments.

Although the best-case scenario involves a seller who owns the property outright, there are situations in which the seller might make this choice despite still having a mortgage on the property. Sellers who do this should ensure that their mortgage requirements allow it. Most mortgages require that sellers pay off the remaining amount due once the home is sold. Some sellers avoid the problem by setting a down payment requirement high enough to pay off the mortgage at the close of sale.

How Do Sellers Go Through the Process?

The way that sellers go through the process may be similar to a standard home sale. Most home sales should include the following steps:

  • List the home
  • Attract interested buyers and offer showings
  • Take purchase offers from buyers
  • Negotiate terms and accept an offer
  • Complete a home inspection
  • Verify home value and financing
  • Confirm that buyers agree to the sale
  • Close on the sale

Some sellers prefer to say that they are willing to consider seller financing as a way to attract more buyers at the beginning. They should keep in mind that bypassing any common step, like creditworthiness, may pose a greater risk to themselves or the buyer.

How Can Sellers Minimize Problems?

Sellers should keep in mind that many buyers who want to use seller financing do not qualify for traditional loans, and this may be for very good reasons. To avoid ending up with a difficult situation, sellers should perform many of the functions of a lender approving a mortgage application:

  • Check applicants' credit
  • Require a down payment
  • Document income and debts
  • Write down payment terms and penalties for default
  • Create a promissory note and have it signed by all parties

Sellers are not bound to accept a specific interest rate. The standard for seller financing is 2-4 percentage points above average.

In some areas, selling a Venice CA home is much more difficult than buying one. Sellers may choose to finance it personally as a way to complete the process more quickly. These tips help sellers know their responsibilities and avoid serious problems.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

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