In today’s lending environment, it’s tough for many buyers – especially those who are self-employed – to qualify for a mortgage loan. Former Federal Reserve Chairman Ben Bernanke was even denied a home refinance loan in 2014. In fact, according to the Mortgage Banker’s Association, roughly half of the people who apply for a mortgage loan are denied. In an environment like this, seller financing can provide advantages to buyers and sellers.
Seller financing means that you, the seller, lend the money to the buyer to buy your home, and thereby become the buyer’s bank. An excellent result can be achieved if both the buyer and the seller can agree on the sale price, down payment, interest rate, and other loan terms.
The advantages to the buyer include:
- Quick and easy loan approval
- Competitive interest rate
- Lower fees than banks and other institutions usually charge
- Less paperwork
The advantages to the seller include:
- Equity in your home turns into an investment from which you can earn a stable rate of return
- Increase the pool of buyers
- The loan is secured by an asset – your own house
There are, of course, some disadvantages. For starters, you won’t get all the cash out of your house at the time home is sold – which may not be a problem for you. Next, you’ll have to worry every month about the buyer actually making their payments. If the buyer defaults on the payments, you will need to bring legal action to get either your money or house back – that is, you will need to foreclose on the house, which isn’t any fun.
Collecting and tracking the payments can be a bit of a hassle, but fear not – there are third party companies called loan services that will do this for you. They’ll take care of all the paperwork, and send you the monthly payment – minus their servicing fee, of course. They will handle collections and the foreclosure process too if need be.
The possibility of the need to foreclose on the buyer’s loan is a very good reason to insist that any seller financing you provide be in “first position” and that the note does not include a subordination clause allowing it to change position in the hierarchy of deeds. Doing a “seller carry back” with your loan going on top of the buyer’s (larger) loan from someone else (another private party, bank, etc.) is risky, because if the buyer defaults on that loan, your “second loan” will be wiped out – gone! – in a foreclosure.
Know too that if time goes by and you want to turn the loan you made to the buyer into cash, there are people who will buy the note from you. You will often have to discount the note from face value (for instance, accepting only 75% of its present value), but in a pinch, there is usually a way to turn that note into cold hard cash.
If you decide to go with seller financing, you should be able to spot the good candidates, just like banks do with people who apply for a loan. Borrowers should provide the following data:
- Their name
- Social Security number
- Three previous addresses
- Employer’s name/address/phone number
- How long they have been at their present employer
- The names and numbers of their last 3 employers
- A copy of their latest federal and state tax returns,
- Year-to-date statement showing income, assets and liabilities,
- Copies of their most recent pay stub (if you believe this is necessary),
- They must sign an agreement for you to obtain a credit report on them