What is it?
Seller financing, or owner financing, is a real estate agreement where the seller handles the mortgage. Meaning the seller provides the financing for the home instead of the buyer applying for a traditional mortgage through a financial institution. There are numerous terms for this that are largely synonymous. Even though seller financing and owner financing seem like they would be opposite, they are actually the exact same. You may also hear the terms contract for deed. On the other hand, rent-to-own and seller financing are not synonymous. When you are renting to own, you are leasing a property with the ability to purchase it at a later date whereas when you are seller financing, you are actually paying mortgage payments to the seller.
How does it work?
Typically, seller financing attracts buyers that are unable to attain a mortgage through a financial institution. Seller financing typically requires less in closing costs and fees, and may close much quicker than financing through a financial institution.
The seller will draw up a promissory note with all of the details of the sale, including: loan amount, interest rate, down payment amount, schedule of payments, and consequences of default.
Seller financing can provide individuals who would normally be considered unqualified buyers the means to secure a home. There are quite a few reasons why banks will not approve loans to certain buyers. For example, having bad credit or being self employed can both make it difficult to get approved for traditional loans. Our home ownership program allows deserving individuals to have the opportunity at a new start if they practice the self discipline required to obtain a down payment. Once they save up for a significant down payment, we are able to help individuals become homeowners without checking credit scores. This opportunity continues to change the lives of families who once never believed that they could become homeowners.
Without using a financial institution, closing costs are reduced. Discount points, origination fees, among other fees can be avoided or minimized.
Seller financing may also only run for a short amount of time. Typically about 5 years, at the end of the terms, a balloon payment would be due. The hope is that the buyer will refinance through a traditional lender due to improved credit and equity in the home.
The largest disadvantage is risk for both the buyer and seller.
Seller Financing for Sellers
You don’t have to finance the sale for a long time. As the seller, you can sell the promissory note to an investor or lender, the buyer then sends the payment to the new “seller.” This can happen as soon as you want, even the same day as closing. However, these notes typically sell for 65-90% of their face value.
Make seller financing part of your pitch. Provide more information to potential buyers, they may even include an information sheet.
Seek out tax and loan-servicing help. If you are inexperienced, this could be very useful in carrying out your loan, receiving payments, and handling any tax complications.
Seller Financing for Buyers
Don’t expect better terms than a traditional mortgage. It’s possible that the interest rate may be lower, but it may require a high down payment, at least 20%.
You may need to sell yourself to the seller. Be open and transparent about the reason(s) you did not qualify for a traditional mortgage. Some of the information will probably come to light when the seller does credit checks, background checks, etc.
You may also propose seller financing if it isn’t already listed as such. It is a good idea to come prepared with your terms. Be aware that the seller may not be free to finance the sale due to still having a current mortgage on the home.
We offer two distinct programs in order to help families in a variety of situations.
Our first program is seller financing, which allows home buyer’s to continue financing with us until their maturity date. We encourage the homebuyers to refinance eventually with the hopes of better interest rates and terms but it is not required. This typically requires a 20% down payment, reliable income, positive landlord references, and more. To reiterate, we do not check credit scores for this option. It was designed to create a new start for dedicated families.
Rent with the Option to Buy
The other program we offer is rent with the option to buy. This program is specifically designed to be an interim solution. We allow a family to rent a home while they build up their credit, savings, and more in order to make them more appealing to lenders. After a few years, it is required that the renters refinance. This holds the home at a predetermined price to allow families to live in their “forever home” until they can pull the financing component together. We even connect families to lenders with experience helping people get qualified for bank loans.
Seller financing is a wonderful opportunity for buyers to purchase homes when they may not be qualified for bank loans. It offers the buyer time to improve credit and show lenders they are disciplined and are prepared to refinance, typically with a lower interest rate. Our programs allow deserving families to start new and become homeowners.