Seller Financing

Seller Financing

How does seller financing work?

When a seller participates in the financing of a real estate transaction, either by accepting back a second note or, if the seller owns the property outright, by financing the entire transaction, seller financing is used. When a buyer has trouble meeting the requirements for a conventional loan or covering the purchase price, sellers typically take this action. In contrast to a standard loan, seller financing does not provide the buyer with cash up front to complete the transaction. Instead, a credit is given against the home's purchase price while the buyer signs a trust deed and a promissory note in the seller's favor. The lender who makes the initial mortgage on the property must agree to these unique circumstances. After the agreements are agreed upon by the buyer and seller, the title or escrow business creates the necessary documentation.

Home sellers discussing financing options with their agent

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 interest rates for seller financing determined?

An owner-carried loan's interest rate is negotiable. To find out the current interest rate on institutional first (or second) loans, ask your agent to contact a lender or mortgage broker. Because sellers don't impose loan fees, seller financing often costs less than conventional finance (points). Current Treasury bill and certificate of deposit rates will also have an impact on the interest rates on an owner-carried loan. Most of the time, sellers won't take on a loan if it would result in a lesser return than they could get by investing their money elsewhere.


What advantages does seller financing offer?

Tax benefits are provided to sellers who use seller financing, and purchasers who do not qualify for traditional credit have access to alternative financing. The dangers that sellers face are the same as those that lenders face: Are they a good credit risk for the lender? Will the property's worth increase over time to the point where all loans secured by it can be repaid? Complete credit checks on the borrower, hazard insurance on the property, and a due-on-sale provision are all recommended. There are other conditions that must be fulfilled regarding finance, disclosure, and payback duration. When putting together a transaction of this nature, it is advisable to seek legal advice.


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