Should You Get Seller Financing? What You Need to Know
Seller financing is a relatively unusual option for home buyers, as many home sellers are not willing to extend credit to their buyers. However, the possibility does come up occasionally, and people who are interested in getting seller financing should be aware of all the pros and cons before making a final decision. If you're a Rossville homebuyer and you're interested in getting seller financing, here's what you need to know.
What Is Seller Financing?
The majority of home buyers who get a mortgage obtain the loan from a mortgage lender, usually a bank, credit union or some other financial institution. However, sometimes home buyers who do not have the ability to qualify for a traditional loan will get seller financing.
The seller financing option happens when a home seller extends credit to the home buyer. The home buyer makes a down payment to the seller, and then credit is extended to the buyer for the amount due.
Typically, the payments made to the seller are amortized over 30 years, meaning it would take 30 years to pay off the house if the payments continued at that rate. However, a typical seller financing arrangement requires a balloon payment after 5 years, for the full amount due to pay for the house. To make the balloon payment, the home buyer must get a traditional mortgage.
The balloon payment comes due at the end of 5 years because it's assumed that, after 5 years, the home buyer should have enough equity built up in the home that they will now qualify for a traditional mortgage. During the time that the buyer is making payments to the seller, the seller usually retains the title to the home. If the buyer defaults on the mortgage, the seller keeps the down payment, the money paid for the house so far, and the house itself.
What Are the Advantages of Seller Financing?
Seller financing enables someone who might otherwise not be able to buy a house to make a purchase. Sometimes buyers take advantage of seller financing because they want to purchase a home that is more expensive than they would otherwise be able to afford. Sometimes, buyers use seller financing because they're not able to get a mortgage for a home of any size or value.
This enables someone who otherwise has no chance to buy a home to make a purchase. Other advantages of seller financing are listed below.
Down Payment Flexibility
Sellers are not regulated in the same way that mortgage lenders are regulated. Sellers may require a smaller down payment than a traditional mortgage lender may require.
Fewer Closing Costs
Without lender or bank fees, there are often fewer closing costs associated with seller financing. This makes closing less expensive, although there may still be fees due at closing.
Faster than Traditional Home Purchase Process
Often, seller financing can be pushed through more quickly than a home purchase through a traditional lender. This just means that the buyer can move into the home and start their life there more quickly.
Possibility of Lower Interest Rate
Some sellers can be convinced to sell the home at a lower interest rate than the traditional lenders. Whether this really happens will vary from one seller to another.
What Are the Disadvantages of Seller Financing?
Although seller financing does have some advantages, there are many disadvantages as well. Home buyers who are thinking about purchasing a home financed by a seller should give careful consideration to all these factors before deciding whether to move forward.
Often Just as Costly as Traditional Financing
While sellers can be flexible about the down payment and interest rate, sellers take on a level of risk when they offer financing to a buyer. This often makes seller financing just as expensive as a traditional loan, if not more expensive.
Balloon Payment Due in Five Years
The balloon payment due in five years puts pressure on the home buyer to ensure that their credit is good enough to take out a mortgage on the home where they already live. For some buyers, this is no problem. For other buyers, it is. What's worse, if the buyer is unable to make the balloon payment in that time, they will have lost their down payment, equity in the home, and the home itself.
Is Seller Financing Right For You?
Seller financing is generally the preferred option among home buyers who cannot qualify for traditional financing, or who want to buy a home that is more costly than what they can otherwise afford. However, the risks of buying a home with seller financing can be great. Home buyers must weigh these risks before deciding whether to buy a home this way.
Work With a Real Estate Professional
If you're a home buyer who is thinking about purchasing a home with seller financing, it's important to work with a real estate agent who can help you negotiate a good deal. Work with a real estate agent who has experience helping home buyers purchase property in this way.