Is Seller Financing a Good Option When Buying a Home?

Everything You Need to Know About Seller Financing When BuyingMany Alexandria home buyers have never heard of seller financing, nor do they know what to expect from a seller financing arrangement. If you're thinking about purchasing a home or purchasing a bit of land, you may encounter a property wherein the homeowner is offering seller financing. Understanding what seller financing is, why people use it and the advantages and disadvantages can help you decide if this type of financing is right for you.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

Financing Basics When Purchasing a Home

Some home buyers pay for their home with cash, but most will get financing. Generally speaking, most buyers who obtain financing get it from a lender like a bank or a credit union.

In order to approve a home buyer for a mortgage, most lenders have fairly strict requirements regarding credit, employment history, the stability of employment, monthly income, debt to income ratios and the like. People who are unable to meet the requirements may not be able to get a loan from a traditional lender. The people who are able to get a loan from a traditional lender may need to pay a higher interest rate or make a larger down payment, or both.

Seller Financing Basics

Instead of getting a loan from a traditional lender, people who have poor credit may choose to get their financing from the home seller. This type of financing has the following requirements:

  • Payments are amortized over 30 years, just as they are with a standard mortgage.
  • At the end of 5 years, the homebuyer must make a “balloon payment” to pay for the rest of the house.
  • Most home buyers are unable to pay for the house with cash after 5 years, so they instead get a traditional loan from a standard lender.

Most home buyers make this type of arrangement assuming that someday they will have better credit and will be in a better position to get a standard mortgage. If they are not able to get a standard mortgage to make the balloon payment at the end of the 5 years, the contract may be broken.

If the home buyer is unable to make payments at any point during the 5-year repayment period, the original homeowner keeps the title to the home and the buyer may be evicted. If the buyer defaults on the original agreement, all of the money paid to the home seller during the 5 year period is simply lost.

Benefits of Seller Financing

Most people turn to seller financing because they're unable to get financing from a standard lender. However, some people choose to get seller financing because they're unable to get financing for a home of the size or value they wish to buy.

In addition, seller financing often requires fewer closing costs. However, home buyers must be aware that there are still fees associated with closing, even in a seller-financing situation. Since the closing process is easier, this can sometimes lead to an expedited home closing experience, and the home buyer may be able to move into their home more quickly than if they were using a traditional lender.

Also, sellers may be more flexible in some of their closing requirements. For example, some sellers may be willing to negotiate a smaller down payment than some lenders. Standard lenders are required by law to ask for a certain down payment, but home sellers are not beholden to the same laws.

Disadvantages of Seller Financing

Still, there are many disadvantages to seller financing regarding the sale of a home. For many, the balloon payment due at the end of five years is a serious disadvantage. Although some home buyers find themselves in a better position to get lender financing five years after moving into their home, some buyers are not able to get lender financing even after time has passed. This puts them in the position of losing the house, their deposit and the money they've paid toward the balance of the home.

In addition, many home sellers who offer financing are not willing to negotiate low rates and other beneficial deals for the buyer. Home sellers who decide to offer seller financing to a potential buyer are taking on a level of risk. To make this worthwhile, many home sellers charge a lot of money.

Work with a Real Estate Professional

Working with a real estate professional can make the experience of purchasing a home with seller financing a better experience. Your real estate professional can help you negotiate the best deal possible, and can also give you tips as you proceed through the home closing process. To get started, talk to a real estate professional today.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

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