What is Seller Finance?
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Are you looking to purchase a home, but are unsure if you qualify for a conventional mortgage? Are you a home owner or Realtor who has become frustrated while trying to find a buyer? Or, are you an investor who is looking to broaden your real estate investment opportunities? If you answered yes to any of these questions, it’s time for you to learn more about seller finance.
So, what is seller finance? Also known as seller carry-back, owner carry-back, private mortgage, land contract and long-term escrow, seller finance is an extension of credit provided by the seller of a home to the buyer to cover part or all of the purchase price. Seller finance is not a new form of financing. In fact, it’s the oldest form of lending – from one individual to another.
How does it work? Often seller financing is used when a buyer has trouble qualifying for a conventional loan due to self employment, high debt or other constraints. But, this doesn’t always mean the buyer is unable to make a monthly mortgage payment. Seller financing can also be a solution when the potential buyer does not qualify for a loan that covers the full cost of the property.
For instance… John and Sue found the perfect home and have negotiated a price of $350,000 with the seller. They are prepared to make a 5%, or $17,500, down payment toward the purchase price of the home. They go to the Bank and apply for a loan, but because John is self employed, they are only approved for $250,000. Dismayed, John and Sue speak with their real estate agent and express their disappointment at not being able to purchase the house they want. After speaking with the seller, the Realtor informs them the seller is willing to carry back part of the purchase price. John and Sue will have a mortgage from the Bank for $250,000 and a private mortgage with the seller for the remaining $82,500.
John and Sue will repay two parties for ownership of the home. The $250,000 loan from the Bank will be paid back according to the interest rates and schedule determined by the Bank. The $82,500 seller financed loan will be paid by John and Sue either directly to the seller, or through a third party payment processor such as Meracord. When drafting the note, John and Sue and the seller will agree upon the terms and conditions including interest rate, length of the loan, payment due dates and late penalties.
This is one example of a transaction completed using seller financing, but there are many variations. Each seller finance transaction can be uniquely tailored to fit the needs of both the buyer and the seller. Other examples of seller financed transactions include lease options, contracts for deeds and standard seller finance first position mortgages.
What are the benefits? The benefits to buyers may seem pretty clear. They’re able to buy the house they want even when unable to qualify for a conventional mortgage. Benefits for the seller include the ability to reach more potential buyers, an increased likelihood of achieving their asking price, and an additional income stream in the form of the buyer’s monthly payment that includes interest.
What’s next? When entering in to a seller finance transaction it is important that you do some research, get the facts, know how to protect your investment and involve the professionals. Discuss your options with your current Realtor, or find a real estate agent who is knowledgeable about seller finance transactions. Use an escrow officer familiar with seller finance for closing and use the industry leader in servicing, Meracord , to handle all your accounting details. Meracord offers direct deposit, automatic withdrawal, monthly statements with account details, year-end tax reporting and much more. By using a 3rd party like Meracord, buyers, sellers and investors can relax knowing an unbiased professional company is handling all their account details. A personal loan may be the oldest form of financing, but Meracord is the modern way of repaying the loan. By following this formula you’re sure to have a successful seller finance transaction and a protected real-estate investment.
Want to learn even more? Do you have a seller finance contract you want serviced? Contact us today!