Posted on June 8, 2017 - 10:01 AM
by Natasha Hunter
Cape Coral Real Estate Group
What is Seller Financing?
Many people believe they can only get a home through a traditional loan but did you know you have other options. Today we are going to discussing seller financing which can be used as a creative home buying technique.
Seller financing is an under utilized tool for buyers who have less than perfect credit, are purchasing a second home or are foreign buyers. With seller financing, the individual sellers takes on the role of the lender. Essentially the seller becomes the bank. Seller financing allows a buyer to move into a home faster and with less stringent qualification factors such as credit. They often can offer better terms than a traditional bank.
How does it work?
Identifying a home that is offered through seller finance is your first step. Not all home sellers can offer this unique program. This is due to the seller having to own the house outright (no mortgage). The home is offered with a set of terms. For example: 20% down, 5% interest rate, amortizored over 30 years with a balloon payment due in 5 years. Most Seller Financing deals end with a balloon payment after 3-5 years. This would mean that the buyer would need to secure funding for the remaining portion of the loan at year 5. Sellers typically want to see at least 10-20% down to exercise this option. This allows the buyer to fix up their credit, seek a better paying job or pay down debt in order to qualify for a loan at a later date.
It is important to note that this is not the same as a rent to own scenario. If something breaks in the home, the buyer is responsible for fixing it, as well as paying for taxes, homeowners insurance, assessments, and anything in between. The seller in this scenario is simply the bank and no longer has any other responsibilities to the actual home.
Types of Seller Financing
All-Inclusive Mortgage - The seller carries the promissory note and mortgage for the entire balance of the home price minus the down payment. In this situation the buyer would hold title to the property and make tax payments and repairs to the home as they occur.
Junior Mortgage - This is not utilized often but can be a life saver when used. Banks typically only finance up to 80% of a home's value. Sellers have the option to carry a second or "junior" mortgage to make up the balance needed to purchase the home. Sellers are weary of this because second mortgages take a back seat if the borrow defaults and the property goes into foreclosure. The bank may also see this second mortgage and use the debt associated with it in your debt to income ratio
Land Contract - Similar to an all-inclusive mortgage except the buyer does not receive title & deed until the final payment has been made to the Seller.
Lease Options - Lease options are very similar to a typical rental lease except that the seller agrees to sell them the property in return for an upfront downpayment. Terms of the loan are typically agreed upon before entering into an agreement. Some or all of the rental payments can be credited to the purchase price. These terms are generally negotiable.
Assumable Mortgage - If the Seller holds an assumable mortgage, a buyer may have the option to take over their existing mortgage. These are rare but do come around from time to time. However, they can help save a lot of money as you have less payments due to the lender. Most assumable loans are Adjustable Rate Mortgages.
What will you need to qualify?
With seller financing there is "no one size fits all" criteria. Each individual seller identifies what they will need to make the deal happen. They make the terms on what they will accept as the down payment, interest rate and length of contract. This allows each seller to be creative in their financing options and work with the individuals on their specific situations. However here is some guidelines that are popular when seller financing.
Most sellers will require some type of loan application. This will include a credit check, vetting employment, assets, financial claims, references and other background checks
Sales contracts will be contingent on the seller's approval of the buyers financial situation.
The home will be used as collateral for the loan. If you default, the seller will be able to start foreclosure proceedings just as bank will.
A down payment will be necessary to enter into a seller financing deal. 20% is common to see in South West Florida as the minimum a seller will allow to enter into the deal however each individual owner decides the terms so you may find someone who is willing to do it for less.
Natasha is a licensed Realtor with RE/MAX Realty Team in the state of Florida. I have a deep admiration for traveling and having one of a kind experiences.They share their experiences so others can see what life in the Sunshine state is really like. Restaurants, Local spots, Parks, and other local activities and real estate news will be included in each newsletter. As always if you have any questions reach out to Natasha 239.233.5163 We love to share our knowledge with new comers.
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