Today’s real estate market has seen some historic markers. Home prices are inflated in many areas. Some experts say that this is due to fewer new construction homes being built as well as national shortages of building materials, thus causing the supply of existing homes to be in high demand.
When conditions such as these present themselves, both home sellers and home buyers find themselves reacting in creative and sometimes unconventional ways. One option that sometimes surfaces is the option for seller financing.
What Is Seller Financing?
According to Investopedia, “A mortgage might be the most common way to finance a home, but not every homebuyer can meet the strict lending requirements. One option is owner financing, where the seller finances the purchase for the buyer.” Sometimes the entire sales price is financed by the seller and other times it may be only done partially.
Essentially, the seller provides a loan to the buyer for the property and by extending credit to the buyer, allows them to make payments back to the seller until the home is paid off. This arrangement takes out the middleman by skipping the mortgage lender and banks. There is still some form of contract in place where both buyer and seller agree to terms for the repayment with the seller often holding the title on the property until it is paid in full.
How Does Seller Financing Benefit the Buyer?
One of the most frequent reasons buyers favor this type of arrangement is in the case when the buyer, for whatever reason may not be able to secure traditional financing. Sometimes this may be due to poor credit or lack of a substantial down payment.
Additionally, buyers may benefit from this arrangement because it can forego a lengthy loan application and approval process, it may save thousands of dollars in appraisal costs and mortgage fees, and a seller may be able to be more flexible on down payment amounts than federal mortgage programs (FHA, VA, or HUD) or traditional mortgage brokers.
How Does Seller Financing Benefit the Seller?
If all of those reasons sound advantageous to the buyer, what about the seller? What might motivate a seller to take on such a transaction? Like the buyer, the seller may be motivated by a fast closing without going through all of the intricacies of a traditional loan. Sellers also benefit because they can set their own interest rates, often higher than going the traditional route.
They can potentially get out of expensive repairs and upgrades that a traditional lender may require by selling the home in an “as is” condition. Finally, if the seller holds on to the property’s title, in the event of a default on payment the seller has both the money paid to them as well as retention of the home itself.
Risks and Cautions Should You Look Out For
As with any expensive financial decision, there are certain risks and cautions to be mindful of. Buyers could end up paying higher than usual amounts of interest in exchange for the flexibility of this agreement. Also, while less conventional, buyers will still require approval from the seller who might have some unusual criteria.
Sellers should take into account what might happen should the buyer default on payment. What will a foreclosure or eviction process look like under these terms? In addition, if there is ever a cause that the seller should have to take back the property, there could be substantial repair costs from the condition the buyers left the home in.
If you are curious to learn more about owner financing or how to locate potential sellers who may be interested in this arrangement, contact your local real estate professional. They often know of extra motivated sellers who may consider owner financing.