With the volatility of the current real estate market and the volumes of “product” sitting on the market going stale, seller financing is going to be the wave of the future.
What is seller financing exactly? Simply put, the seller agrees to be the mortgage holder and to allow the buyer to pay him/her directly for the monthly house payment instead of or in lieu of the buyer securing a traditional bank held mortgage.
Why would a seller agree to this? There are several reasons but in this current economy, the biggest reason is to generate cash flow rather than have a vacant home sitting on his/her hands generating nothing but more expense and debt. With this being a buyer’s market and so many homes on the market nationwide not selling, it helps both the buyer and the seller.
The typical buyer seeking seller financing probably has some credit challenges that will take a couple of more years to clear up and currently can’t get acceptable bank terms to finance the home through traditional means. This buyer may or may not have a down payment available to offer a seller so the seller may allow them to add an additional amount to the payment each month until an agreed amount is paid in.
Seller finance contracts are typically known as “land contracts”, “deed in lieu of”, “seller carry” and “lease/rent to own” contracts. These are not to be confused with “lease options” which are rental contracts that lock in a purchase price and give the renter the “right” to be the first person to offer to buy the home after a pre discussed length of time. The seller typically credits a small portion of the rent back as “closing cost assistance” when the renter initiates the final purchase contract.
Seller financing can help the seller by giving him/her cash each month to make payment on the mortgage they currently have on the home or as just cash flow to pay on another property or expenses. The down side for the seller is that they must give the buyer ample time to be able to qualify for a refinance of the home. That term must typically be 12 months minimum. The buyer will have to show 12 months canceled checks as proof that they have paid on time for at least a year to most major mortgage lenders.
Once buyer and seller have agreed on terms and are ready for the buyer to take possession, they need to meet with an attorney or title agent and have the Note and contract drawn up. These should be signed , notarized, and recorded just as a traditional mortgage would be at the court house. This protects the seller in case the buyer defaults on payments and this gives the buyer a “mortgage history” to show the new lender when they are ready to refinance in 12 months or more.
The only thing that is not accomplished with a seller financed mortgage is a boost to the buyer’s credit. Seller financed mortgages don’t show up on credit reports so it is up to the buyer to maintain their other trade lines and keep their credit moving in a positive direction during the term of their note with seller. This is important so that once the seller held note expires and the buyer is ready to secure traditional financing, they are able to do so without complication.
Seller financed mortgages can be a win-win for everyone involved and all a great way to get into that first home if you have some challenged credit or no credit.