Seller Financing Guide

The seller of real estate will sometimes finance the sale for the buyer. Sellers often finance for a shorter period and at a higher interest rate than traditional lenders. However, closing costs are generally less for a seller-financed home than for those that traditional lenders finance.

What is seller financing?

Seller financing, also called owner financing, is one way to move a property sale forward if the buyer cannot obtain a mortgage from a traditional source. Buyers may be unable to obtain a mortgage because they lack a good credit history, a large down payment, or long enough work history to qualify for a traditional mortgage. Or, they may be unable to obtain a mortgage through a traditional lender because of the age or condition of the property.

Seller financing can help a seller obtain a higher price for the property than if the buyer finances the mortgage through an institution because the property doesn’t have to appraise for a specific amount. Sellers can also sell a property as-is more easily with seller financing. Seller financing is usually quicker than financing through a traditional lender because appraisals and inspections aren’t necessary unless the buyer requires them.

How does seller financing work?

Seller financing involves the seller drawing up a promissory note contract that details the interest rate, the number and amount of payments and the consequences if the buyer fails to make payments.

One of the advantages of seller financing is its flexibility. Sellers and buyers can structure financing creatively based on their own needs. For example, the seller can structure the loan for a short time, such as five years, and include a balloon payment at the end of the period. Balloon payments require the buyer to pay off the loan at the end of the period, such as by a cash out refinance. Balloon payments require the buyer to pay off the loan at the end of the period, such as by a cash out refinance. The buyer may qualify for a traditional loan at the end of five years based on higher credit scores and more property equity.

Types of Seller Financing Agreements

Seller financing can take various forms, each with its own set of terms and conditions. Here are some common types of seller financing agreements:

Assumable Mortgage: The buyer takes over the seller’s existing mortgage, assuming responsibility for the remaining payments. This option is often preferred when the existing mortgage has favorable interest rates.
Holding Mortgage: The seller extends a loan to the buyer for a portion of the purchase price, secured by a mortgage on the property. This arrangement allows the buyer to finance the purchase without needing a traditional lender.
Land Contracts: Also known as contracts for deed or installment sales contracts, land contracts involve the seller retaining legal title to the property until the buyer completes all payments. The buyer makes regular payments to the seller, and upon full payment, the title is transferred.
Land Loans: Specifically designed for purchasing vacant land, land loans often have different terms and conditions compared to traditional mortgages.
Lease Purchase: The buyer leases the property with an option to purchase it at a later date. A portion of the lease payments may be credited towards the purchase price.

Seller Financing: Pros & Cons for Buyers and Sellers

Seller financing can offer unique advantages for both buyers and sellers, but it’s crucial to weigh the potential benefits against the drawbacks.

Advantages for Buyers

Easier Qualification: Seller financing often has more flexible qualification requirements compared to traditional loans, making it accessible for those with less-than-perfect credit or limited financial history.
Faster Closing: Since you’re dealing directly with the seller, the closing process can be quicker and less complicated.
Negotiable Terms: You have the opportunity to negotiate terms, such as interest rates and payment schedules, directly with the seller.

Disadvantages for Buyers

Higher Interest Rates: Interest rates on seller-financed loans may be higher than traditional mortgages.
Balloon Payments: Some seller financing agreements include balloon payments, requiring a large lump sum payment at the end of the loan term.
Potential for Complications: Disputes or misunderstandings with the seller can arise, potentially leading to legal issues.

Advantages for Sellers

Faster Sale: Seller financing can attract a wider pool of buyers, potentially leading to a faster sale.
Higher Selling Price: You may be able to sell your property for a higher price due to the financing flexibility offered.
Steady Income Stream: Seller financing provides a consistent stream of income through regular payments from the buyer.

Disadvantages for Sellers

Risk of Default: The buyer may default on their payments, leading to foreclosure proceedings and potential financial loss.
Responsibility for Property: If the buyer defaults, you may be responsible for property taxes, insurance, and maintenance until the property is resold.
Delayed Receipt of Full Payment: You won’t receive the full payment for your property upfront, which may impact your financial plans.

Can sellers finance a property they are still paying a mortgage on?

Sometimes sellers can finance a property on which they are still paying a mortgage, but they must be sure their current mortgage doesn’t contain a due-on-sale clause, which requires repayment of the mortgage in full when the owner sells the property. So, if the seller is still paying a mortgage with a due-on-sale clause and seller-finances the the property, the seller’s mortgage company could demand immediate repayment. If the seller doesn’t pay the mortgage in full, the original lender will foreclose, leaving the new buyer in the lurch.

If the seller’s mortgage does not contain a due-on-sale clause, the seller will propose a wrap-around loan. The wrap-around loan takes into account the amount the seller still owes, and the seller will structure its terms so that they make a profit on the spread, which is the difference between the interest rates they pay and the amount they charge the new buyer.

For example, suppose Suzy still has $60,000 remaining on her mortgage. She sells her home to Brian for $100,000, who pays 10 percent down and borrows the rest at a six percent interest rate. Suzy’s interest rate is three percent. So, Suzy will receive $10,000 in cash and earn six percent interest on the difference between $100,000 and $60,000 and three percent interest on the remainder.

Do sellers have to carry the loan for the entire term?

No, sellers using seller financing don’t have to carry the loan for the entire term. While they cannot force the borrower to refinance, pay off the loan, or sell the property, they do have the option to raise money by selling all or a portion of the remaining payments to a company that buys private mortgage notes. The sale can often occur soon after the closing, allowing the seller to receive a lump sum almost immediately.

Deed Street Capital buys privately held mortgage notes, including those held by sellers. We purchase notes with values from $25,000 to $3 million. We offer fair prices for the notes based on several factors, including:

We have extensive experience buying mortgage notes from sellers who are seeking to obtain cash now for their mortgage note.

Seller Financing FAQs

Is seller financing a viable option for buyers and sellers?

Seller financing can be a great option for both buyers and sellers, especially when traditional financing is not available. It offers flexibility in terms and can help the seller attract more potential buyers, but it requires careful consideration of the risks involved.

What is the downside to seller financing?

The main downside to seller financing is the risk of buyer default, which could result in financial loss for the seller. Additionally, sellers may need to manage the loan and deal with potential legal issues without the assistance of a traditional lender.

Who owns the title during seller financing?

In most cases, the seller holds the title to the property until the buyer has fully paid off the loan. Once the loan is paid in full, the title is transferred to the buyer.

Does seller financing go on your credit?

Seller financing typically does not appear on your credit report unless the loan is formally reported to credit bureaus by the seller or through a third-party service. This means it may not directly affect your credit score unless it’s reported or you default on the loan.