If you are selling your home you may have considered using seller financing to get it sold quickly. By seller financing we mean lending money to the person that is buying your home and acting as a financial institution for them. Contracts can be made up that allow you to loan the money to the buyer and then collect the interest from it.
This can greatly speed up the selling time for a home since many people do not meet the stringent requirements for mortgage loans at a bank. Also, a lot of people have a very hard time coming up with the initial down payment for their first home. If you need a quick sale you may consider seller financing as a viable option.
What Are the Benefits of Seller Financing?
The benefits of offering financing can be great. You'll probably be able to sell your house very quickly since a lot of people are looking for this option. You also won't have to wait for the banks to give a final decision on the potential buyer's mortgage. When you need a fast sale, financing is one of the quickest ways to get it done.
You'll also make money off of the deal. You can charge a competitive rate of interest and see money flowing into your bank account every month. You are in fact taking the equity that you have built up in your home and turning it into an investment opportunity. As well, this loan is secured by the home itself.
What Are the Drawbacks of Seller Financing?
One of the downfalls to seller financing, and it is a major one, is if the buyer ends up defaulting on the mortgage payments, you will have to go through the cost and the hassle of setting up legal action to see your money or to take back your house. This is why many people avoid seller financing altogether.
As well, you won't end up with a lump sum payment for your home. You'll need to be in a position where you can handle small payments instead of one large upfront payment. If you are selling and need the large cash amount to buy another home, this type of financing won't work for you.
Understanding the Process For Seller Financing
It's not as simple as finding an interested buyer and drafting a contract to set up a seller financing situation. Since you're acting much like a bank would in this arrangement, you should do your due diligence in checking the financial history of the buyer. Requesting a credit report and running an affordable background search on the buyer's rental history can help you determine the risk you're taking in offering financing. Don't forget to verify their employment and income level just like a bank would before approving a mortgage request.
After verifying you're dealing with a worthy buyer, you'll need to work with the local public records office to file the correct paperwork for a deed of trust. This document states the terms of the purchase and states that the buyer will only become the legal owner after paying back both the principal and the interest. You can also set up a lease to own arrangement or try a land contract that creates partial ownership for the buyer that doesn't result in a title transfer until the payment terms are fulfilled. After deciding on the contract terms and filing the paperwork, you should also go ahead and find a real estate lawyer to keep on call just in case the financing agreement falls through.
Consider Your Options Before Choosing Seller Financing
It's up to you whether you'd like to take the risk or not. This financing can only work in some situations where there is a reliable person taking on the mortgage contract and a seller that can forego a large upfront house payment.