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.
While the guidelines on seller financed loan are less stringent than the traditional mortgage lender, the seller also evaluates the credit worthiness of the buyer before she decides to go through with the sale. Any blemishes on your credit history and a poor credit rating that would have affected your home loan application with the traditional lender are likely to impact your chances with seller financing is one. However, you may be in a position to explain the transgressions and flaws in your credit report and the lender might be much more lenient than a traditional mortgage lender. The Smart house sellers will always pull a copy of your credit report as well. So there is almost never any point in hiding any problems that you have on your credit file. As is the case when working with the traditional lenders, you should try and fix the problems on your credit report before you apply for a mortgage.
You can provide a written and detailed explanation of any great credit report problems at the time you applied to the seller for a loan. Other ways to appease the seller is to make a larger down payment or get somebody who has a proven record of high income and financial resources such as relative to cosign with you on your mortgage loan. You can also consider an FHA loan or if you’re a veteran a VA loan.
Negotiating The Terms Of Seller Financing Loan
You should consider seller financing only if you can save a sizable sum of money on the deal. This is of course of the other factors such as the house having no flaws, not being overpriced etc. have been taken into consideration. In order to know whether you are getting a profitable deal on seller financing or not, you can call the local lenders to find out the rate they’re charging for the size and type of mortgage that you are in the market for. For example a 15 or 30 year fixed-rate mortgage for an owner occupied or rental property. Get a good faith estimate from these lenders asking about all the fee and processing charges for the origination of the mortgage loan. Generally, if you do not have noticeable problems with your credit such as a poor credit rating, you can easily qualify to borrow from a traditional lender. However, you should expect better terms than traditional mortgage lender from a seller financing. Since you’re dealing with an individual, the terms and conditions can be highly flexible and just how good a deal you get will depend on your negotiations can. Aim for at least a 1% reduction in the outgoing interest-rate as well as upfront fee. If a traditional mortgage lender is offering 8% on the mortgage with two points by the upfront, aim to pay no more than 7% with one point by down to the cellar.
You should be aware of the fact that apart from choosing traditional borrowing methods from traditional lending institutions such as banks and credit unions, you can also sometimes take advantage of a property on which the seller is offering financing. Some sellers offer to lend you money if you agree to buy their homes, the reason why sellers do this because it helps them sell a house in a sluggish market, it may help and get a higher price and provide a better return on their investment.
Why these are the reasons why you might get a good deal with homes that have seller financing, they are also the reasons why you should be cautious. Generally speaking sellers offering houses for sale with financing tends to be selling programmatic houses with major flaws. If the property has had problems being sold and it is also possible that it may be priced far above its fair market value. However, the positive reasons are that the sellers may be looking to promote the sale of the property when the local real estate market is going through a slow phase. They may also be looking at it from an investment point of view where they can’t think of a better return than two invest the proceeds of the sale as a private mortgage loan.
Asking The Seller For Seller Financing
In some circumstances you can ask the seller to provide you with financing and financial help even if he hasn’t offered initially on the house. You can consider asking the seller for financing and consider seller financed purchase in the following circumstances.
The property does not have any fatal flaws. You should avoid buying a house with incurable defects that would result in you spending thousands of dollars in fixing it.
The property being sold is valued at its fair market value. Even if the seller financing offers you an interest rate on the loan that is a certain percentage lower than what you can get from a conventional lender, it will not matter much if the property of your interest has been valued much higher than its fair market by the. The more the property is overpriced, the longer it will take for you to build up equity in your home.
The cost of the seller financed loan should be as low or even lower than the loan you can get from a traditional mortgage lender. There is absolutely no requirement of taking some refinancing if it doesn’t save you money. Typically speaking seller financed properties should be giving at least 1% less interest-rate than a traditional mortgage lender. Of course you can also consider seller financing if you have other good reasons to consider borrowing from the sellers such as blemishes on your credit report which are unacceptable to traditional mortgage lenders.