Guide To Seller Financing Agreements Part 1

Oct 5, 2023 | Buying A Home

Traditional financing isn’t always the right option when buying or selling homes. Seller financing agreements might be a better fit for some people. With seller financing, the seller acts as the lender so the buyer can purchase the home.

This post will cover the basics of seller financing agreements in real estate.

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The Basics of Seller Financing Agreements

With a seller financing agreement, the buyer does not get a loan from a traditional financial institution. The seller is the lender and, in most cases, the buyer receives no cash for the loan. Instead, they take possession of the property, and pay the agreed amount to the seller to settle the debt.

Types of Seller Financing Agreements

Seller financing agreements come in different forms. The choice of different deal structures depends on the needs and goals of the parties. These are a few of the typical deal structures for seller financing:

  • Land Contracts: This is like a form of shared ownership between the parties. The seller keeps the title until the borrower settles the debt. However, the buyer has equitable title to the property.
  • Wraparound Mortgage: Also known as an all-inclusive trust deed, this combines existing financing with a new loan. The seller keeps making payments on the original mortgage with payments from the buyer.
  • Lease Purchase: This is commonly known as a rent-to-own contract. Lease purchase agreements allow tenants to rent property with the option to buy later.
  • Assumable Mortgage: This option involves the buyer taking over the seller’s existing mortgage with the approval of the mortgage lender.

Terms for Seller Financing

Seller financing can simplify the process. However, both sellers and buyers must consider the terms of the agreement. Depending on the deal structure, there may be various terms for seller financing.

  • Interest Rate: The buyer and seller must negotiate an interest rate for the loan. In most cases, seller financing has higher rates than traditional mortgages.
  • Down Payment: Some sellers require the buyer to make an initial down payment.
  • Collateral: Most seller financing will use the property as collateral, so the seller could take possession of the home if the buyer defaults.
  • Payment Terms: The payment terms can vary depending on the agreement. It could include features like the amortization period, size of monthly payments, penalties for late payments, etc.

This post covers some of what buyers and sellers need to know about seller financing. Stay tuned for part two to learn more.

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