- What is seller financing?
Homeowners who are anxious to sell often consider seller financing, which may
include taking back a second note or even financing the entire purchase if the seller owns
the home free and clear.
Seller financing differs from a traditional loan because the
seller does not give the buyer cash to complete the purchase. Instead, it involves
extending a credit against the purchase price of the home while the buyer executes a
promissory note and trust deed in the seller's favor. These special circumstances must be
acceptable to the lender who makes the first mortgage on the property.
The necessary paperwork is prepared by the title or escrow
company after the terms are worked out between the buyer and seller.
It is critical to thoroughly evaluate the creditworthiness of
the buyer first. Fear of default makes many sellers reluctant to take back a second. But
seller financing can bring a higher price plus complete the sale sooner in some
situations.
Resources:
- IRS Publication 537, "Installment Sales." Order by
calling (800) TAX-FORM.
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- What are the benefits of
seller financing?
Seller financing offers benefits
to both buyers and sellers including tax breaks for the seller as well as offering an
alternative when conventional loans can't be found.
The risks involved are the same risks facing any lender. Is
the borrower a good credit risk? Will the property hold enough value over time to allow
for the repayment of all loans made against it?
Sellers should run a full credit check on the borrower,
require hazard insurance on the property and include a due-on-sale clause. There also are
financing, disclosure and repayment-term requirements that should be met.
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- How are the rates set for
seller financing?
The interest rate on an
owner-carry loan is negotiable. Ask your agent to check with a lender or mortgage broker
to determine the current rate on institutional first (or second) loans.
Seller financing typically costs less than conventional
financing because loan fees (points) typically aren't charged. The interest rate on a
seller-carry loan will also be influenced by current Treasury bill and certificate of
deposit rates. Sellers usually aren't willing to carry a loan for a lower return than they
would earn if their money was invested elsewhere.
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