Why should you offer seller financing?
Is Seller Financing for you?
When you help a buyer buy and finance a home, you can benefit in 2 ways. First, this can be a way for you to earn some interest on the loan. And you’ll probably earn more than what you’ll earn at your local bank. Plus, the loan will be secured by the real estate. As a result, if your buyers default, you can begin the process of foreclosure to recover your asset. As an example, a buyer comes to you to ask if you’d give them the mortgage. You agree and charge over the going interest rate. And if the buyer needs seller financing, they’ll probably pay it – within reason. Because, if they could get traditional financing, they wouldn’t be asking you. You can make an interest only note or a fully amortized one. Additionally, it can be a 30 year term, 20 years, or possibly a 5 or 10 year balloon. It’s your call. I know of a case where a buyer asked the seller to hold a mortgage, no interest, 5 payments once per year to pay the entire balance. And that proposal was accepted. There’s no rules here, just whatever the buyer and seller agree upon.
Oh – and the second way? You’ll get your home sold.
Get an attorney
You’ll want to work with a local real estate attorney. Your attorney will properly execute the loan while protecting your interest.
Why Would They?
Why would a buyer ask you to finance all or part of the purchase? Probably because they’ve applied and couldn’t qualify for a traditional mortgage. Which raises an interesting question. If a bank wouldn’t give them a mortgage, why should you?
But why are they asking you to finance. And why would they accept a higher priced mortgage in the first place? Quite often it’s because they’re newly self-employed. A traditional wants there to be at least two years of self-employment. And this must be verified by filed federal income tax returns. As an example, someone has been working as an electrician for 50 years and decides to go open his own business. But he’s only been self-employed for a few months. And a bank may have a problem with that. But if he has clients, his bank statements show some cash flow from the business and everything else is in order, he may be a good candidate for seller financing.
What do I look for?
Before you give someone a mortgage, you should review the buyers as a traditional lender would. Start with a credit report. And get the credit report yourself, don’t use one the borrowers supply.
You’re looking for current credit accounts with activity. Examine the outstanding balance and compare it to the credit limit. As a rule, lenders want the balances to not exceed 33% of the limit. You should look for the same. If there’s an occasional late payment on a credit account, it’s not a big deal. However, beware if there are multiple “late pays”. Especially if they’re recent. On the credit report you’ll only see late payments made more than 30, 60, 90 days late.
Verification their employment and income. Get copies of recent pay stubs covering a 30 – 60 day period. If the buyer is self-employed, look at both their personal and business tax returns. As a rule, a lender wants the total mortgage payment, including property taxes and insurance, to be around 33-38 percent of gross monthly income. If the buyer is within this range, you might have a good candidate.
Bottom Line
Seller financing, be it a first or second lien, is your decision. If you can carry a mortgage for your buyers and get better returns than you can get at their bank, that’s great. Additionally, the loan is secured by the asset. However, if you need to foreclose, that can be expensive and time consuming.
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