Seller financing offers more flexibility when buying a house than a bank loan does. Buyers whose credit rating isn't good enough for a professional lender might still strike a financing deal with the seller. It usually requires a seller who owns the home free and clear, because the buyer won't provide enough money at closing to pay off a mortgage. Sellers who offer financing usually expect a higher sale price in return.
There are several ways to structure seller financing, so the agreement must spell out which option is in play. The seller can finance the entire mortgage loan, or lend the buyer just enough of the purchase price that the bank will cover the rest. With a land contract, the seller keeps title to the property until the loan is paid. Each approach has pros and cons. A land contract, for instance, usually comes with a lower down payment, but a buyer who defaults has no equity in the property and loses the payments already made.
Dollars and Sense
Buyer and seller should specify all the financial details in the written agreement, including the down payment, total purchase price, interest rate and the length of the mortgage. Many seller-financed mortgages last just a few years, after which the entire loan comes due in a balloon payment. If that's the case, the contract should say so. The agreement should also state the penalties if the buyer defaults. Usually, the house is collateral for the loan, so if the payments stop, the title reverts to the seller.
A loan contingency is a clause written into the financing agreement that allows one of the parties to call the sale off or renegotiate the loan later. A standard contingency with seller financing is that the seller gets to review the buyer's finances, just like a professional lender, and call the deal off if the buyer is a poor credit risk. Another contingency to include in the original contract is the option to negotiate a new mortgage in the event the buyer can't cover a balloon payment.
The agreement must conform to any specific rules in state law. In Texas, for example, if buyer and seller negotiate in a language other than English, they must write out a copy of the agreement in that language. Texas buyers using a contract for deed have the right to cancel the purchase within 14 days of signing, and the agreement must say so. State laws are available online on the state government's website; using a local real estate broker or attorney knowledgeable about seller financing can help assure your agreement meets any location-specific rules.
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