Last updated on December 13th, 2021 at 12:50 am

Last Updated on December 13, 2021 by

Most loans are financed by lending institutions. There are times when a seller is asked by a prospective buyer to finance the purchase in whole or in part. I would from my experience suspect that the majority of sellers who receive offers to request that they finance the purchase have no experience with the concept. Perhaps this article will help as I have participated in this type of financing.

Some buyers have difficulty qualifying for a government-backed loan or even a conventional loan. These are the people who are most likely to request the seller to finance their purchase. Almost everyone experiences times when they have less than stellar credit because life happens. Of this large group, there are people who have good jobs or a good source of income, perhaps they are self-employed. In fact, the self-employed have the greatest difficulty obtaining loans or loans with reasonable terms.

Some sellers have decided that they have no specific plans for the funds that could come from the sale of their home other than placing the funds into some type of interest-bearing investment. These sellers should have indicated in the listing information that they would be willing to finance all or part of the sale of their property. Other sellers have not even considered the possibility so they first learn of the option when a prospective buyer approaches their real estate agent. Let’s discuss some of the things you may want to consider before actually deciding to finance your property.

Perhaps the first thought running through your head is what will I do with the funds from the sale? Are the funds taxable etc? If the property is your primary residence you have a $250,000 exclusion on the profit from the sale ($500,000 per couple). If the property was your primary residence and you have rented it for a while, consult your tax professional to determine if some or all qualify for the exemption. Why do I mention taxes? You have options and one of those options is to defer your tax depending upon how the loan is structured. This is a larger topic that you can discuss with your financial advisor or CPA.

If you do not have a home for the funds from the sale, why not consider becoming a lender? You can demand better than market interest for your property because the borrower knows that you are essentially a lender of last resort. I recently completed a transaction where the buyer is paying 10% interest on a 30 year amortized loan due in 5 years. Yes, the rate seems high but in this case, the borrower placed very little down and has a very low credit score but a fixed source of income.

Basically, the buyer has five years to improve the property to increase its value to the point where they can obtain a 30-year loan at a good rate with 20% equity. I should mention that this was a fixer. The interest rate at 10% exceeds typical stock market returns and is secured by real estate. The worst-case scenario for a seller is that you foreclose and take back the property which will have been improved in this case.

You have to determine if the funds from the sale will earn more for you with equal security in the future to help make the best decision. Sometimes the seller finances because the price of the home in its condition is above market. The buyer is willing to buy it because they can get financing.

There are options available to you as the seller, you can finance 100% or a portion of the amount. The buyer may be eligible for a first mortgage but they require a 20% down payment to avoid PMI. You loan them 10% of the value and take a second mortgage against the property, they put down 10% and obtain a loan for 80%. They may have a 4% first mortgage loan and you give them a 10% second mortgage loan so their blended rate is manageable. You can determine the time period of the loan e.g. five years and the amortization period e.g. 10 years.

If you decide to do a second mortgage with the seller, you need to be aware that to protect your investment, you must be in a position to make up late payments to the first mortgage company and then take over the property. You can work this out with the first mortgage lender should it happen. Generally, the law requires that buyers are given 90 days to cure the deficiency before eviction so you may have to make three or four months payments.

There is another method to sell your property and help the buyer. You can agree to a wrap-around mortgage. What is a wrap-around mortgage? The buyer agrees to pay x$ each month to the seller. The seller retains the existing mortgage in place and pays that mortgage. If for example, you sold your property and the monthly payment to you is $1,000, you will be obligated to pay the finance company the $800 that you owe them and you retain the difference of $200. Generally on a wrap around the buyer pays something upfront e.g. x% as a down payment. This down payment goes to the seller.

The seller’s lender may have “due on sale” terms in the loan agreement which would technically prevent this type of transaction but I have seen them anyway. This is not a preferred method of financing but there are times when it is appropriate. I was in the process of buying an apartment building and about two weeks before closing the seller informed me that they were in foreclosure. There was no way that I could obtain a loan for the purchase and have the deal closed before the seller lost the property.

We agreed that the seller would keep the original loan which I paid up to date immediately after the quitclaim deed was filed (a title search had been done). Without the need to act immediately, I began to remodel the property while making payments directly to the seller’s bank. When the remodel was completed, I obtained a new loan. In this case, I was reacting quickly to the issues at hand and it worked out. As some say, “don’t try this at home”.

If you have determined that you may want to finance part or all of the property, consider including this in the MLS. Contact your escrow or attorney and discuss how they will work out the documents e.g. note and deed of trust. You can also work with a loan broker for a fee who will complete the credit check and other lending documents.

Should you decide to do seller financing, be bold about the asking price and the interest rate. Remember, the prospective buyer will come to you because they will have difficulty obtaining a loan at 4% interest. Hard money lenders who work with property flippers charge double-digit rates because of the risk. If you want, you can overprice your property and give a lower interest rate. The point here is to ensure the financial transaction reflects the risk.

If you have lenders with a credit score greater than 720, you may consider rates, terms, and sale prices that are more closely related to the normal market. Be aware, you may be approached by individuals who are in this country illegally and who are unable to obtain a loan because of this fact. If they get deported, you may not be notified and it may be difficult to impossible to determine if they just stopped paying, left, or were deported. You will want to verify credit for anyone you sell to. Know who you are working with.

In general, seller financing, in my opinion, is a good thing. It helps buyers obtain a new home and helps sellers earn a reasonable return on their investment. It may also be the only way you can sell your property for a reasonable price.

You can read more about this topic by going to my personal blog site RetireCoast.Com. There is a similar article on the Retire Coast website “Seller Financing, an option” along with other articles about financing and investment. The Mississippi Gulf Coast is a great place to live and invest. Seller financing is more common here since the cost of homes is lower and many properties are valued under $100,000. Some lenders will not loan below $100,000 and many if not most will not loan under $50,000. The most seller-financed properties in this area are vacant lots that are purchased for as low as $2,000.

Logan&Anderson, Gulf Coastal Realtors offers information on our site such as this blog. We caution readers to seek professional advice on all things real estate from Real Estate Agents (such as we are) to Licensed loan brokers, CPA’s and Attorneys. Use the information provided above at your own risk.