Seller financing can be an attractive option both for the seller and the buyer. It works primarily for buyers who cannot qualify for a traditional loan. If you want to get approved for the conventional housing loan, you need to have an excellent credit score and a down payment of 10%-20%. If you can’t pay that much for the down payment or don’t have the needed credit score, then you cannot qualify for a conventional loan.
For sellers, an owner financing deal can provide a competitive edge. The strategy especially works for sellers who are also landlords. Let’s say you have a great tenant who has been renting your home for the past five years.
Now you want to sell the house, and the tenant is interested in making the purchase. You have known that person for the last five years. You know they are responsible and have kept the house in great shape. If they cannot qualify for a traditional mortgage, maybe you can help them by acting as the bank. You can lend them the needed money and keep collecting mortgage payments like you have been getting rental fees before. Seller financing deals are legal and an essential part of the real estate world.
How to Structure an Owner Financing Deal?
Just like renting a property, you have to be careful when selling your home. You need to screen the buyer. Make sure that they can afford to keep the house. You are acting as the bank so you can use the loan structure used by the local banks.
The Promissory Note
The promissory note explains all the terms of the contract. The buyer promises to pay you back within the mentioned time. It enlists the repayment amount, interest rates, terms of foreclosure, the down payment, and so on.
If the buyer fails to pay you back, you can assume ownership of the house by foreclosing the property. However, foreclosures are expensive even for the bank, and you want to avoid that situation.
In a seller-financing deal, all terms are negotiable. You can choose not to charge any interest rate. You can approve the loan without asking for any down payment. However, you’re giving your house away. Having a down payment creates a financial cushion for you. It shows that the buyer is serious about buying the home. For the same reason, it is best to charge an interest rate and ensure that you are getting an ROI.
The Balloon Payment
The bank can issue a 30-year mortgage, and they can wait for that long. However, you don’t have to. Like mentioned earlier, seller financing deals are helpful for those buyers who have a poor credit score. If they keep paying the mortgage on time, the credit score will go up in a few months. In the next few years, they might be able to get a conventional loan.
You can set up your loan in such a way that after 5 or so years, your loan becomes due. You can charge a balloon payment. At that point, the buyer can refinance the house. You will get the funds, and the buyer will purchase the home at favorable terms.
Do you have a house that you financed years ago, but now you want to let go of that responsibility? You want a lump sum of cash and finally, be free from the burden.
If that’s the case, you can sell the note to a reputable real estate investor. If you have a quality house and a great buyer, then selling the note can be a win-win situation for you and the investor.