There are usually two ways to buy a home: 1) you buy it outright in cash, or 2) you get a mortgage to finance the purchase. But we all know that getting a mortgage is not an easy road to go down. Even if you’re extremely qualified, it’s a stressful process, and anything against you will make the process even more arduous.
Mortgage lenders won’t lend if they have any doubts about the borrower or the property, but there is another way to buy a home: seller financing.
Seller financing (sometimes called owner financing) is where the seller of a home finances the purchase of the home for the buyer, so the buyer does not need to seek a traditional mortgage.
Seller financing is most common in house sales involving family members or unconventional homes where a mortgage may be difficult to acquire, but it is an option for any sale, provided the seller is in a position to offer it.
Like a traditional mortgage, the buyer may make a down payment, will pay monthly installments, and interest on the loan.
Yes, provided legal documents are produced and signed, it’s all above board. These documents include a promissory note and should be created and/or approved by an attorney.
A promissory note is a document that lays out the terms of the loan, including things like interest rate, the repayment schedule, term of the loan, any balloon payments, how overpayments or early repayment will be handled, as well as how missed payments and defaults will be handled.
In some cases, the new buyer will get the title when they get the loan, while in others the original owner holds the title until the loan is fully paid. If the promissory note and other legal documents have been produced properly, neither option should cause any legal difficulties down the road.
Most seller financing loans are for smaller amounts than a traditional mortgage (but do not have to be) and over a shorter term. Sometimes, seller financing will be for 5-10 years with a lump sum (known as a balloon payment) due at the end of the term, at which time the buyer can pay the lump sum in cash or get a new loan or mortgage (from a loan or mortgage company) to cover the cost now they are (hopefully) in a stronger financial position.
Owner financing offers a lot of benefits for both buyer and seller, but it’s certainly not without its downsides. Let’s take a look at the pros and cons of seller financing.
- Faster closing – there’s no waiting around for mortgage companies to appraise and underwrite before you can close on the property
- Cheaper – there are fewer closing costs involved if a home is seller-financed
- Flexible terms – the downpayment, term, and interest rate can be easily negotiated to best benefit both parties
- Sellers may make more – Since a seller isn’t selling their home for a price and then moving on, they may make more for their property than they would if they sold it outright due to the interest on the loan, especially if it’s in an area that doesn’t see house prices rise much in a 5-10 year period
- Makes homeownership more accessible – a buyer who is a reliable person but unable to qualify for a traditional mortgage (such as a hard-working single person with kids or someone who was in a period of financial hardship for a short time) can realize their dreams of homeownership
- Sellers can sell a home “as-is” – Meaning they don’t usually need to do any work to the house to sell it
- Easier to finance a property – Some properties can be difficult to finance if mortgage companies aren’t sure what to do with it (for example, if it is both a commercial and residential property), but seller financing removes that issue
- The monthly income can be easier to manage than a lump sum – if you’re selling and are retired or otherwise looking to boost your income, you may find that the monthly income from the property plus the interest is more beneficial for your budget than a lump sum (but it does depend on how you manage your money in general)
- The seller needs to own the property outright – if the seller doesn’t own the property outright the whole thing can get very messy legally and financially for everyone involved (including the seller’s mortgage company or any other lender with a lien on the property). The only exception to this is if the buyer’s down payment is large enough to cover any of the seller’s debts on the house and they are cleared as a part of the sale
- Balloon payments can be difficult to navigate – Balloon payments (lump sums) can be difficult to navigate if the buyer’s financial situation hasn’t significantly improved so they can pay it off directly or by borrowing from another lender
- It drags out a sale – Instead of a sale taking weeks or months, it takes years to complete a sale
- The seller needs to be in no rush to be rid of the property – The seller needs to be in a unique position of being willing to take a smaller monthly payment for the property and have somewhere else to live
- There’s a lot of opportunity for things to go wrong – When seller financing works, it’s a great solution for both parties, but when things go wrong, it can go seriously wrong, often ending in an expensive court case
- It’s not as simple as it seems – You can’t just write up an agreement on a scrap of paper and call it a day, you need to pay attention to things like the Dodd-Frank Act and make sure a lawyer is involved in the process
If you’re a seller, you need to think carefully about whether or not seller financing is really the right option for you. Remember that seller financing will tie you to the property for another 5+ years, so consider if you’d rather have a lump sum payment now (via selling the property outright) or the additional monthly income over that time.
If you’d rather sell up for good but are worried that you’ll struggle to sell your house the traditional way, we can help. We buy houses in Massachusetts for cash in “as-is” condition, so you don’t need to do anything more than tell us about your property to get it ready for sale. We’ll then offer you our best cash offer and we can close in as little as 2 weeks if you accept. You’re under absolutely no obligation to do so, so why not see what we can offer you for your property?