What is Seller Financing: Closing and Document Preparation Part 1

Dec 1, 2022 | Selling a Home

Buyers and sellers don’t always need to go to a bank to complete a real estate deal. The parties might sometimes use seller financing to facilitate the sale. What is seller financing? Read on to learn more.

What is Seller Financing?

Before getting into the specifics, you need to understand seller financing. With this type of sale, the seller is also the lender. The buyer doesn’t need a conventional bank or credit union mortgage.

With seller financing, the buyer pays the seller in installments. It can even function similarly to a mortgage. The home is collateral for the loan, and the seller will make scheduled payments.

Some sellers prefer this option because it can increase the return on investment. It can also clear red tape and lead to a faster closing.

For the buyer, the advantage could be an opportunity to finance a home purchase when you can’t get a mortgage. However, the disadvantage is that you may end up paying higher than the market value.

Another issue is that you must handle all the financing and closing between the parties. You won’t have the bank there to facilitate the process.

Now that we know what seller financing is, let’s look at common seller financing agreements.

Lease Purchasing

Most people know this as a rent-to-own agreement. With this type of seller financing, the seller agrees to lease the house to the buyer for a time. However, the lease also comes with a purchasing agreement. In exchange for an upfront fee, the renter can purchase the property when the lease ends. With most lease purchase agreements, a portion of the rent goes toward paying the cost of the house.

Land Contracts

Under a land contract, the buyer does not get the title at the deal’s outset. Instead, the buyer and seller sign a contract outlining the loan’s terms. Once the buyer meets the terms, the seller transfers the title. The buyer will usually need to pay a lump sum upon contract completion.

Holding Mortgages

A holding mortgage is like a conventional mortgage, but the seller is the lender. The buyer and seller would work out all the same details and terms of a standard mortgage. However, the seller will retain possession of the title until the buyer pays the entire mortgage.

Partial Mortgage

Most banks won’t finance more than 80% of a property’s value. If you don’t have enough, the seller can cover the difference by offering a loan. You might call it a partial or junior mortgage. The seller gets the money from the first mortgage but extends the loan for the remainder. After that, the buyer agrees to make payments to the seller.

Check out part 2 of this post to learn more about seller financing deals. In part 2, we look closer at the documents and terms of seller financing.

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