When you are finally ready to purchase a new home you of course have to find a way to finance your new purchase. Since a new home is usually the largest single purchase you will ever make you need to explore every option available to borrow funds to pay for this large purchase. I suggest that you meet with several banks right away to determine how much they will lend you based on your income, what is the interest rate they will charge, how much do you have to put down as a deposit and how long of a mortgage can they offer. One of the financing options other than borrowing from a bank is seller financing where the seller in essence acts as the bank. Let’s take a look at how this works.
The seller can finance the entire purchase transaction if they own the home free and clear. Why would a seller choose to do this? Typically it is because the buyer has difficulty qualifying for a conventional mortgage loan. Often the seller in this situation has personal reasons to sell the home to a particular buyer, or is in a hurry to complete the transaction. Sellers who agree to finance can often get a higher price for the property.
Seller financing typically costs less than conventional financing because sellers don't charge loan fees, known as points. Sellers who carry a loan earn a return on their investment in the form of interest. The interest rate on an owner-carried loan is negotiable.
Seller financing differs from a traditional loan because the seller does not give the buyer cash to purchase the home, as if the seller were a bank issuing a mortgage loan. Instead, the seller extends a credit against the purchase price of the home. Typically, the purchaser pays a deposit and works out a monthly payment schedule for a set number of years that includes principle and interest with standard monthly amortization schedules based on the interest agreed. You can find these schedules on the internet.
Everything is negotiable and if the two parties are willing (buyer and seller) terms can be worked out that make sense for all concerned. The lawyer will prepare the necessary paperwork after the terms of the sale are worked out between the buyer and seller. The buyer executes a promissory note or enters into an Agreement to Deed and the title deeds are held by the seller until the house is paid off so the seller is not at risk. If the purchaser can not make the monthly payments the seller keeps all the money paid and takes back the house.
Sellers who decide to finance the sale of their own home are taking a risk that the purchaser will default but it could be a win for both parties. If you choose this option, you are accepting greater responsibility for the transaction, and should rely strongly on the expertise of your lawyer and your real estate agent. It may not be the ideal option for everyone but it may be right for you!
If you are seller who is going to use this self-finance option, you should proceed with seller financing only if you are confident that the buyer will live up to their end of the deal.
