Selling Your Home - Seller Financing
What is seller financing?
Seller financing is when a seller
helps to finance a real estate transaction by taking back a second note,
or even financing the entire purchase if the seller owns the home free
and clear. Usually sellers do this when a buyer has difficulty
qualifying for a conventional loan or meeting the purchase price. Seller
financing differs from a traditional loan because the seller does not
give the buyer cash to complete the purchase, as does a lender. Instead,
it involves extending a credit against the purchase price of the home
while the buyer executes a promissory note and trust deed in the
seller's favor. These special circumstances must be acceptable to the
lender who makes the first mortgage on the property. The necessary
paperwork is prepared by the title or escrow company after the terms are
worked out between the buyer and seller.
If you are a seller
considering such an arrangement, it is critical to thoroughly evaluate
the creditworthiness of the buyer first. Fear of default makes many
sellers reluctant to take back a second note. But seller financing can
bring a higher price as well as complete the sale sooner in some
situations. For more information, contact the Internal Revenue Service
for a copy of its Publication 537, "Installment Sales." Order by calling
(800) TAX-FORM.
How are the rates set for seller financing?
The
interest rate on an owner-carried loan is negotiable. Ask your agent to
check with a lender or mortgage broker to determine the current rate on
institutional first (or second) loans. Seller financing typically costs
less than conventional financing because sellers don't charge loan fees
(points). Interest rates on an owner-carried loan will also be
influenced by current Treasury bill and certificate of deposit rates.
Sellers usually aren't willing to carry a loan for a lower return than
they would earn if their money was invested elsewhere.
What are the benefits of seller financing?
Seller
financing offers tax breaks for sellers and alternative financing for
buyers who can't qualify for conventional loans. If you are a seller,
the risks you face are the same as those facing any lender: Is the
borrower a good credit risk? Will the property hold enough value over
time to allow for the repayment of all loans made against it? You should
run a full credit check on the borrower, require hazard insurance on
the property, and include a due-on-sale clause. There also are
financing, disclosure, and repayment-term requirements that need to be
met. It is wise to consult a lawyer when putting together this kind of
transaction.