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Frequently Asked Questions
Get all of your questions answered on the mysterious world of Seller Financing (a.k.a., Owner Will Carry or Owner Financing).
Should I buy now or wait?
That is always going to be a personal judgment call. All real estate markets fluctuate over time. Purchase prices will go up in a Seller’s market. Those same prices will go down in a Buyer’s market. This is also seen in the stock market where you have Bull and Bear cycles.
There are a few things you must consider when deciding if you should buy now or wait.
- What are prices doing right now and does it look like it will go up or not? Determining if we are in a Bull or Seller’s market means that prices are going up because there are typically fewer sellers than buyers. This occurs when inventory is low and there is a lot of demand for housing. In a Bear market or Buyer’s market means there is a lot of inventory and buyers can be a lot more selective. They also can offer less than what a seller is asking and many times will get the home under contract.
- What are the interest rates doing now and expect to do in the future? If interest rates go up even by 25 basis points (0.25%) will mean you will be paying more each month for the same dollar amount borrowed. Sometimes this will mean you will only qualify for a lower dollar amount of a home.
- If you are in it for the long haul then market fluctuations don’t really matter very much. If you plan on staying in a home 10 or more years then home prices typically will go up over larger stretches of time.
Other factors to consider are what are the rental rates doing in comparison to mortgage payments. If you could be paying less on a mortgage payment than a rental then you are actually saving money. The amount of principal reduction and the tax savings on the interest rates can be huge over time. Not to consider the pride of homeownership and other benefits of owning versus renting.
What should I do before listing with an Agent?
You will want to interview your possible agents who can assist you in achieving your goals. Every agent is different and every home is different. You want to make sure the agent and home are a good match.
The first thing is to define what are your goals on the sale? What will you do once the home sells? Where will you live? Do you want to make more than the purchase price? There are a plethora of things you need to think about before selling? You do not want to be starting to cross that bridge on the day you have to move out.
Investors call this their “exit strategy”. What is your exit strategy or strategies that you are open to taking?
How long is the typical Seller Financing?
This is an aspect that is always up to negotiation. Typically you can see that they will last from 3 to 5 years. Most seller financing deals are based on a 30 year amortization schedule with a balloon payment. The balloon payment means at the time it “balloons” the entire remaining balance must be paid.
I have seen 10 year seller financing deals and I have seen 1 year deals. It all depends on how long the seller is willing
What is a balloon payment?
A balloon payment is when after a certain amount of time has elapsed that the remaining loan balance is due in full.
As an example, let say you are doing seller financing on a home that has a 5-year balloon payment. This means that on the 60th monthly payment the remaining balance of the loan is due in full.
How do I avoid an upcoming balloon payment?
If you are in a deal where a balloon payment is coming up soon there are essentially only a few things that you can do. Some are good and some are not. I will assume you want to avoid the non-favorable ones.
First, you can refinance the home with new conventional financing. This will pay off any previous debts on the property.
Second, you can sell the property for higher than what your remaining balance is. This, again, will pay off all of the liens against the home.
Third, you can talk with the person who financed you renegotiate the note. Possibly getting an extension or an entirely new note created.
Fourth, you can give the property back to the previous seller. This can be done via a Deed in Lieu of Foreclosure or being foreclosed upon.
Who determines the interest rates and the other terms of the loan?
Terms like interest rate, balloon payment, etc. are all part of the negotiation process.
Use a mortgage calculator to determine your principal and interest payments for the amount you are borrowing. Then write up an offer, or talk with your Agent, to get terms that are agreeable to both parties.
Do not forget that you will also need to understand that you still will have property taxes, homeowners insurance, and possibly other months fees like HOAs, SIDs, and LIDs.
What is Seller Financing?
Seller financing is when the seller of the home (the current owner) will finance a buyer acting as a bank.
In these cases, you don’t need to go through the traditional loan approval process.
Sometimes you will hear the phrase “owner financing” as another way to say this technique.
How much should I put down when doing seller financing?
With the down payment, it will depend on the needs of both the buyer and the seller.
Typically, you see the down payment to be around 20% of the purchase price, but it can go as low as 10% or up to 30% or more.
What interest rates can I expect?
The interest rates with seller financing are usually higher than the normal interest rates found with traditional financing.
When the Fed keeps the interest rates low then you can expect seller financing to be a few “points” (i.e., percentage interest rates) higher.
In those times you can see possibly as low as 5 or 6%. When the Fed raises interest rates you can expect seller financing to be 10 – 12%.
Why would a seller do seller financing?
There are numerous reasons why a seller would do seller financing (a.k.a., “carry paper”).
Many would do it in a tough economy to help buyers who would not be able to get traditional financing.
Another reason is to have cash flow with the worries of being a landlord. The bank doesn’t get called for a stopped up toilet.
Another reason is to sell a property making the down payment portion but they don’t have to pay taxes on the sale of the property because they have not received all of the proceeds until the future.
This is a great tool a retiree may do to have cash flow in their later years.
Do I need good credit to do seller financing?
Usually, credit is not an issue when it comes to seller financing. Most people who use this tool for a primary residence is doing it because they have credit issues yet they do have money.
If credit is an issue the seller may ask for a higher down payment.
Do I need to live in the home to do seller financing?
This question of should you live in the home will depend on the negotiations between the buyer and seller. It should be disclosed upfront just as if you were buying a home through traditional methods.
What is the difference between owner financing and seller financing?
Both phrases “owner financing” and “seller financing” are used interchangeably in the investor community.
However, I am a stickler for words and usually avoid the phrase “owner financing”. The reason is that if you are buying a home you are becoming the owner when you occupy the residence. Thus, if you use that word then that would mean you are financing yourself.
To avoid confusion the seller of the home is the one who is financing you. Thus, seller financing is a better phrase for this type of transaction.
Does the seller has to own the home “free and clear” to do seller financing?
Having a home being sold is “free and clear” would be ideal.
But, the actual answer to that is No. And it can also be “it depends”.
When a seller sells a home via seller financing and he/she has an existing mortgage then that home is sold being encumbered.
In the western U.S., this is called an A.I.T.D. (All Inclusive Trust Deed). In the south, it is known as a Wrap Around Mortgage (Wrap).
If a home has an existing mortgage then you want to take extra precaution to ensure your payment is equal to or greater than the seller’s payment. If it is less then there is the possibility that you could be foreclosed upon even though you are making your payments.
In any case, I strongly suggest on any A.I.T.D. deal that you use a third-party loan servicing company.
In the cases of “it depends” then that would depend if the seller’s loan on the property has an existing Due on Sale clause. Thus, if the bank were to find out they could call the loan due to the seller. He would either have to pay it off or refinance. This can become a very tricky issue in those cases.
Will seller financing improve my credit?
It is highly unlikely. Most owners will not be established enough to report your mortgage to any of the three repositories (Experian, Equifax, and TransUnion).
How do I find people who are willing to do seller financing?
The best case is to contact me to check the MLS for people willing to do seller financing for you.
As a REALTOR®, I have experience in putting these types of deals together.