If the time comes for you to sell your house, offering seller financing may help begin the sale and broaden the pool of potential buyers for your home. Traditional mortgage lenders are subject to many rules and regulations that force them to deny certain mortgage applications.
However, making loans to borrowers who have been rejected by traditional lending institutions can be risky business. In order to consider making a loan against the house that you are selling, all of the following conditions should be true.
After having lent the cash to the buyer of your property, you should still have enough cash to buy your next home. Most of the house sellers needs the proceeds from the sale of the current property to be able to buy their next one.
You should be willing to do the necessary work to check the credit worthiness of the buyer. Not doing so could result in a default on the loan. The only smart way you offer credit financing is to ascertain the credit worthiness of the buyer carefully before you sign the deal.
You have carefully contemplated the eventuality that the buyers may stop making payments on the loan and you might have to initiate the expensive process of foreclosure in order to recover your money. You have also considered that in spite of initiating foreclosure, you might not be able to recover the money that you are owed by the buyer.
You have considered the taxation repercussions of offering seller financing because the interest on a loan is not tax-deductible. If you’re in a high income tax bracket and are looking for tax saving investment, you are probably better off investing in tax-free bonds or retirement plans.
Only if all of the above conditions apply should you consider seller financing because on its own it is a risky venture. It will all depend on how smart you are about making a choice of whom to sell the house to and how carefully you have established the credit worthiness of the buyer. Even then, circumstances can arise in any creditworthy buyer’s life that could prevent future payment on the loan such as loss of a job, serious illness premature death etc.