Seller Financing
Discounted asking prices and enticing low interest rates have local home buyers out in strong
numbers shopping for a good deal on a home as sellers scramble for their attention in a
competitive market.
But along with these incentives brought on by the economic downturn, more conservative
lending guidelines mean that minor credit blemishes or a shortage of down payment funds can
take otherwise ready, willing and able buyers out of the running.
Seller financing is potentially a way for buyers to avert some of these financial stumbling blocks.
For sellers, it is a way to appeal to this same pool of buyers in a way that competing listors
may have forgotten.
Seller financing is most commonly used when there is a gap between the purchase price and the
maximum amount the conventional lender is willing to loan on the property. In cases where bank
appraisals come in conservatively below the sales price, an offer including seller financing
may be what is needed to close the deal.
Here is an example of how it might work. If a property is selling for $600,000 and the appraisal
comes in at $575,000 ... and the buyer really wants the property and is willing to pay the
difference of $25,000 but they don’t have the cash, the seller may offer to give the buyer
“seller financing” for the $25,000. Assuming the buyer’s lender is OK with this, it might be just
what makes the transaction work. The seller gets what they need and the buyer gets what they want.
Tighter lending criteria, enacted to assure secondary market investors that mortgages are a good
risk, have also contributed to borrowers coming up short even if the appraisal comes in at the
purchase price. If you don’t qualify for VA or FHA financing, which still offer low-down payment
options, qualifying for a loan means coming in with a large chunk of cash — usually a 20 percent
down payment.
Lenders and underwriting guidelines have been strict in qualifying buyers. Conventional financing
often requires 20 percent down. Not everyone can meet these guidelines, so they need to look for
other financing options.
For sellers, there are additional benefits for offering to carry the loan. Seller financing may
make selling a leasehold property, a condo-hotel or a non-conforming property — all scenarios
that have very limiting conventional financing rules — easier.
Is Seller Financing For You?
Although seller financing is appealing in some circumstances, it is not for everyone.
Typically it is only an option when the seller doesn’t have a mortgage to pay off, as virtually
all mortgages have a “due on sale” clause that requires any existing mortgage to be paid off
when it is sold. When the seller does own the property free and clear, there are a couple
different ways to offer financing assistance to the buyer: a Purchase Money Mortgage or an
Agreement of Sale.
The difference between the two is primarily with who gets title — with the PPM title passes to
the buyer at closing and with the agreement of sale, title remains with the seller until the loan
is paid off.
In both cases, the primary lender must approve the agreement. If they do, the paperwork can all
be handled through the escrow company.
The seller gets the price they want without having to compromise and the buyer is able to purchase
the property they want at terms that are reasonable.
While there hasn’t seen a sharp increase in this type of financing yet, some sellers are considering
it as an alternative when, for one reason or another, the buyer can’t get loan approval at rates
and terms desirable to them. Likewise, for sellers, this may be a way of appealing to a larger
segment of qualified buyers and making their property more competitive than others on the market.