When it comes to buying real estate the most important aspect is having the money to do so. Whether it’s cash, traditional financing or private financing you have to have the dough to make the deal go.
In this post we will talk about a form of private financing that many people don’t think to consider.
Seller financing is when the person you are buying the home from decides to carry the mortgage. In essence, they play the role of the lender.
This type of financing has pros and cons for both the buyer and the seller so let’s discuss them.
Buyer Pros & Cons:
With this type of financing you are working directly with the seller and they do not have any pre-set lending rules they must adhere too. Nearly everything is on the table for discussion. Rates, payment term, down payment size, even what it will take to qualify for the financing.
When applying for a loan through a traditional bank there isn’t a whole lot of flexibility in the criteria to qualify. If you don’t have a set W2 income it gets even more difficult to procure financing. However, with seller financing the owner can decide what qualifies you.
I have seen in many cases just a down payment being enough as the owner knows the investor will collect rental income that can support the buyer making mortgage payments.
Remember, if done right the seller can foreclose on the property if the buyer fails to make payments. Same as a bank would.
Shorter Payment Terms
One of the cons you do see with seller financing though is the payment terms. For instance, the loan may be amortized at 30 years, but have a balloon payment at the end of year five.
This would mean the buyer needs to pay off the remaining balance of the loan at that point or risk defaulting on the loan. This term setup is not uncommon because unlike a bank with loans coming due all the time; a person may not want to wait another 30 years to get all the money from their one loan.
Seller Pros & Cons:
Rather than just selling a property for whatever profit they have on it. When a seller finances a purchase they make interest from the payments over the course of the loan. That can lead to an additional income of 25k to 35K over the course of even just five years on a $100k loan.
Expands Your Pool of Buyers
Many times there are investors that want to buy, but they have already maxed out their traditional lending means. If seller financing is an option, now these investors are candidates to purchase the property.
This is the one big con of providing seller financing. If the buyer doesn’t pay, not only are you not receiving the expected income payments, you also have to go through the foreclosure process and incur the expenses to do so.
Like anything else, be sure to perform due diligence and hire the appropriate parties to setup the contracts and escrow. Many states require a lawyer, but in some a title company can set it all up for you.
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