Seller Financing offers home owners an opportuity to increase their pool of potential buyers when selling their home. This financing mechanism makes it easier for buyers who can not easily obtain mortgages by reducing the down payment and reserve requirements from them.
With a tight credit market, lenders have reserved their best interest rates for highly qualified borrowers with FICO scores of 720 and above. Also, these mortgages require 10-20% down payments from these buyers which might not be ideal for every buyer specially if the home needs some repairs.
There are two common options for creating a seller financing plan for a real estate transactions. One is for the buyer to agree on a promissory note that details the repayment terms. With this option a Deed of Trust is recorded and the ownership is transferred to the buyer. The second option is for both parties to enter into a Real Estate or Land Contract which is recorded. The difference between the 2 options is that on the Land Contract, the title of the property is not transferred to the buyer untill all the payments on the note has been paid to the seller. However, with a Real Estate or Land Contract is a preferred option if you are concerned about default where your buyers might not make the payments on the loan. WIth the Land Contract in place, there is no need for you to foreclose since you are still on title.
The benefits of Seller financing then is the following:
1) reduced Down Payment: If you structure the seller financing as a 2nd lien then that amount could serve as the down payment amount which would reduce the risk for the lender to underwrite a mortgage for the 1st lien.
2) More Demand Because you are reducing the challenges for financing your home’s purchase, you will have more buyers who will be able to write offers on your home. These buyers would not be able to obtain a mortgage to buy your house with the seller financing in place.
3) Hasel Free Income: By offering seller financing, you are generating a stream of monthly income which is secured by your property. With seller financing, you will have monthly income without worrying about property management and repairs since the buyer is responsible for them.
4) Higher Interest rate: You can charge a high interest rate if you are carrying a 2nd loan as part of your seller financing plan. But be careful not to violate your state’s usury laws of your State.
Contact Us if you are interested in selling your Silicon Valley home.