Refinancing a seller-owned mortgage to a traditional mortgage is simple, as long as your credit and your finances are in order. The process is exactly the same for a seller-owned mortgage as it would be a for a traditional mortgage, so there are no hidden issues. The difficulty for some buyers is that they originally got the seller-owned mortgage because they could not qualify for a traditional loan. If this is your situation, you will need to demonstrate your creditworthiness to the new lender.
Items you will need
- Proof of last 12 months of mortgage payments
- Contract with the seller
- Proof of income
- Proof of debts
Contact a mortgage broker to shop refinance rates. A broker can look at your income and credit and find multiple quotes for your refinance. Alternatively, you can look online for rate quotes and contact the institutions that will give you the lowest rate.
Make sure you meet the lender's loan requirements. The minimum required credit score varies by lender, and many will heavily weight the payment record demonstrated by the past 24 months of activity. As a general rule, lenders look for a total debt-to-income ratio -- including the payments on the loan you are applying for -- of 38 percent or less.
Fill out the loan application. A refinance works just like a traditional home loan, so you must provide proof of stable employment, along with a copy of the contract you have with the seller, proof that you have paid your mortgage on time for the past 12 months, and information on any other debt you are carrying.
Submit the loan application and supporting documentation to the lender. Check on the status of your application regularly and provide any additional documentation or information as requested.
Provide the lender with a current home inspection and home appraisal. These are necessary because with refinance loans most lenders restrict the loan to 80 percent of the home's value.
Make arrangements to pay the difference between the refinance amount and the outstanding amount due to the seller, if you have less than 20 percent equity at the time of the refinance.
Sign the loan papers and pay any fees the lender requires. When determining which lender to use, look at the fees as well as the rates. Some lenders will offer a lower rate but require more points. Each point represents 1 percent of the home's appraised value, which can add up quickly.
- If the seller has not transferred the deed to you as part of your original mortgage, you cannot refinance. This is something you should have checked for when you signed the original seller-financed mortgage. However, if the owner has given you a lease option or a contract for deed, instead of a warranty deed or the equivalent used in your area, you can still obtain a traditional mortgage through a lender. In that case, you would be obtaining a new home loan instead of a refinance and the 80 percent maximum loan-to-value ratio rule would not apply to you.
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