Five Tips For Seller Financing
According to the National Association of Realtors, seller financing is on the rise. For frustrated sellers with plenty of equity in their homes, it could be one way to help move a stalled property off the market.
There are plenty of people who have cash on hand, good jobs and pay their bills on time but don't have good enough credit to get a loan, says Vince Scott, CEO of Intero Real Estate Services in Nevada. A self-described "fixer and flipper," Scott has successfully offered short-term seller financing on several occasions. It's "neighbor helping neighbor," he said, "good old-fashioned American spirit."Patriotism aside, there is financial risk involved for individual home owners who offer to play banker. Just how safe is it for a home seller to carry the financing for someone who likely couldn't get a loan from a bank, especially if that buyer has a tarnished credit rating because they walked away from another property?
Here are some tips if seller financing is something you're considering.
1) Get a substantial down payment.
Banks are regularly requiring 20 percent down, so you can require the same -- or even more.
The money your buyer gives you upfront is yours to keep should he default on the loan. It should be enough to justify the risk you are taking and compensate for the hassle and expense you will have if you need to foreclose and evict him. Think about what could go wrong: Your buyer could lose his job, face large medical bills or simply walk away if the value of the home drops below what he owes you. Get as much up front as possible.
2) Vet the buyer.
You can and should ask for permission to run a credit check, to see pay stubs and even tax returns. If the buyer says no, you can say no to the idea of playing banker. Why did the bank turn him down? There are absolutely circumstances where qualified people are getting their loan applications denied. Examine those reasons carefully.
3) Set the terms you want.
You can determine that you only want to hold paper until the buyer is able to qualify for a conventional loan -- three years after a short sale or seven years after a foreclosure. At that point, the buyer of your home needs to find a conventional lender or sell the house to meet the balloon payment. It rarely makes sense for a seller to offer a 30-year loan. You also can set the interest rate you want to charge; most owner-financings tend to be one percent to three percent above the rate for a 30-year mortgage.
You can also establish penalties for late payments and lay out the actions you will take should payments not be delivered on time. Bottom line: A missed or late payment means you can start legal proceedings to take the house back.
You can also command a higher price for your house because you are offering to hold the mortgage, although in this market, just increasing the odds of getting a buyer in the door may be accomplishment enough.
4) Make it worth your while financially.
Scott says that owners can make 8 percent to 10 percent on their money, which pretty much beats any other investment opportunity out there. There are also tax advantages to receiving the proceeds of your home sale spread over time, so talk to your tax adviser. Some owners simply prefer the idea of getting a monthly "income" check from the proceeds of their former house.
From a buyer's perspective, there are no closing costs involved, no points to pay. This saves thousands of dollars.
5) Stimulate interest in your home for sale.
Advertising that you, the seller, are willing to hold the mortgage can greatly increase the pool of people interested in buying your home. In an economic environment where lending standards have never been tighter, it is a huge advantage for your property to be the one where buyers can get financing.
Seller financing also attracts people looking for a "lease to own" situation, where a portion of each month's rent goes toward a down payment on buying the home.
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