Selling your home can be a stressful task. You have to be diligently on top of your paperwork and organized to the hilt, all while ensuring your home is presentable to prospective buyers at all hours of the day. Deciding to sell your home using seller financing can add to that stress. Also known as owner financing, seller financing is where the seller of a property or business provides the loan to the purchaser.
When to Use Seller Financing
With the housing crash of 2007, mortgage lenders tightened their lending standards to the point that there are almost no subprime loans issued. The end result is that a large group of lower-credit home buyers has minimal options for mortgage financing. That's where seller financing comes in; you, the seller, become the mortgage holder to your homebuyer. According to themortgagebuyer.com, the demand for seller-financed mortgages will continue to rise as more and more homebuyers realize they don't qualify for a loan. Beware when using this tactic to sell your home, because it will help you sell, but in turn could lead to larger problems if you end up with a faulty borrower.
Advantages of Using Seller Financing
Of course, the No. 1 advantage of this kind of tactic is reeling in significantly more potential buyers to your property. Also advantageous to you is a quicker sale with fewer middlemen to go through as well as the ability to defer potential income tax liability. Also, in most cases the note you create can be sold and liquidized at any point.
Creating a Mortgage Note
The integrity of your mortgage lies in how well you construct an air-tight mortgage note or deed of trust. It's highly recommended to employ a competent attorney to represent your interests and help you with any loopholes and drafting the documents. Major things to think about include the sale price, any down payment, the interest rate you charge, the borrower's credit worthiness, the amortization of the loan or how long it will take to pay off, whether you decide to impose escrow payments on the borrower, and title insurance required of the borrower.
Think Like a Banker, Not a Home Seller
Banks make mortgage decisions based on logistical facts as opposed to emotion, and you should, too. Make sure you evaluate the borrower's credit worthiness through his credit report, and require him to make escrow payments to ensure tax and insurance payments are being made. Verify income and employment information by looking at income statements and copies of tax returns. Think about setting a shorter loan term; most seller-financed loans are five years or less, and are intended to be a bridge loan until the borrower can get into a more financially stable situation.
Closing the Loan
It's important to have your attorney accompany you to the closing. After the close of the sale, make sure your new mortgage or deed of trust is recorded immediately to protect your interests.
If you're not sure you want to handle all the mortgage paperwork and don't mind shelling out additional funds, it may be a smart choice to hire a contract-collection or loan-servicing company. This company will compute the payment using the principal, interest and outstanding balance and will send the borrower loan coupons. It can even deposit the mortgage payments to your account and prepare end-of-year statements.
Lisa Carlson works as an associate director of recruitment and graduate programs at a public university, and has experience in management, marketing, personal finance and nonprofit organizations. She is a peer-reviewed author on publications for higher education recruiting and holds a B.S. in marketing and a M.B.A.