The Advantages & Disadvantages When a Seller Carries a Mortgage

Seller mortgages carry no loan fees -- which makes your new home less expensive.

Seller mortgages carry no loan fees -- which makes your new home less expensive.

Properties don't always have traditional mortgages. Sometimes, the seller of the property is willing to structure a transaction to provide the financing for the buyer. These transactions are advantageous for both buyer and seller since they allow the seller to turn a property into an income stream while saving the buyer from getting a loan from a bank. On the other hand, seller financing transactions also have drawbacks for both parties.

Seller Advantages

Many sellers choose to offer financing to the buyer because it lets them avoid getting a large lump sum of cash from the sale of their property. Instead, they get a larger total amount, receiving payments of interest and, usually, principal. Seller financing also has tax benefits since it allows sellers to spread out their capital gain over time, instead of having to pay their capital gains tax, if any, all at once at the time they sell.

Seller Disadvantages

Seller financing has two major drawbacks for sellers. By becoming the bank, the seller takes the risk that the buyer won't make his payments. If this happens, the seller will lose the income stream and could end up having to take the property back. Seller financing arrangements eventually end with the buyer either paying off the loan or refinancing it. This leaves the seller with no more income or with an eventual lump sum of cash to reinvest and for which she may still have to pay capital gains taxes.

Buyer Advantages

As a buyer, seller financing saves you from having to go to a bank and get a mortgage. At a minimum, this can save you an inconvenience and the potential expense of closing costs. If you can't get a mortgage from a bank, seller financing may be the only way that you can finance a real estate purchase. When your seller is your lender, you frequently also have the ability to negotiate terms that may work better for you than those a bank will offer, including a low down payment.

Buyer Disadvantages

Seller financing isn't a panacea, though. First, most seller financing arrangements don't go on your credit report, so you won't have the benefit of having timely mortgage payments contribute to your score. In addition, many sellers structure their financing with a balloon, meaning that you will have to refinance the loan in the future, and if you can't get a refinance mortgage, you could lose your house. Finally, if the seller still has a mortgage, you could lose the house if the seller stops paying her mortgage, since the bank's interest comes before yours.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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