When buying a home, traditional financing is not the only way to ensure the home purchase. While traditional home loans offer lump sums of money to the seller, seller financing is a slightly different situation. With seller financing, the seller stays more involved with the home’s purchase and gives up the lump sum, but may sell the home more quickly than with a traditional loan.
Seller Financing and Traditional Loans
Seller financing works similarly to traditional loans in that the seller and the buyer are bound by a contract. The contract allows the seller to foreclose in the event of non-payment and the seller is able to charge interest on the home payments. With seller financing, the buyer often pays smaller monthly payments and is able to achieve approval status at the discretion of the seller instead of the bank. For the buyer, this is great news, but, what does the seller get out of the situation.
What’s in it for the Seller?
A seller who has offered the buyer seller financing is willing to take the risk of default due to the interest they are able to charge on the home. If the seller financing is set up with 5% interest, over the life of the loan, the seller will recoup 5% more than the asking price on the home. This is easy money in the bank for the seller and can be viewed as a sort of investment.
Sellers who finance homes most often set the terms to a 5-10 year payment plan with a balloon payment at the end of the payment period. The balloon payment will either be paid by the home buyer, or financed through a third party lending agency. If a home buyer is going to have to finance the loan anyway, why take the seller financing?
Helping the Struggling Buyer
Home buyers who are unable to qualify for traditional financing are often only able to buy a home through seller financing. This gives the buyer a 5-10 year period to improve credit ratings and reports in hopes of obtaining financing at the end of the seller payment term. If the home buyer is unable to obtain financing at that time, the loan will default and the seller will retain the home with the ability to resell at their leisure.
Types of Seller Financing
Seller financing can be achieved in one of two ways, either by a full loan for the purchase price (short term, large balloon) or through lease to own. A lease to own agreement states that with a larger than normal down payment, the buyer can lease the home for 2-3 years with a portion of the monthly payments going toward the price of the home. Over time, the amount “saved” will add up and the buyer will be able to use that money as a down payment of sorts on the home through traditional funding pathways.
For the home buyer with not-so-perfect credit, seller financing helps to make the inconceivable dream of home ownership a reality. While it may seem easy to obtain financing through a seller, the ending balloon payment is often larger than the buyer can pay at one time and eventually (by the end of the payment terms with the seller) the buyer will need to obtain traditional financing.
(Article originally published by RS Banks on Suite101.com)