4 Things You Need to Know About Seller Financing
Though it's not a commonly used option, seller financing is available for people hoping to buy a Tipton County home who can't tap into traditional lending resources. If you're a home buyer who has poor credit or other reasons why a traditional mortgage arrangement would not work for you, seller financing may be a good option. Here's what you need to know.
1. Differences Between Seller Financing and Traditional Financing
Before a home buyer can understand what seller financing is, they should first understand traditional methods of financing.
To apply for a traditional mortgage, the home buyer contacts a lender and provides extensive information about their personal finances, taxes and employment history. The buyer provides information that helps the lender calculate their debt-to-income ratio and allows the lender to run a credit check.
Eventually, the buyer must put down an earnest money deposit for the house. After going through an extensive escrow process, the buyer must also put down their down payment and closing costs. When the house is finally purchased, the homeowner must pay a monthly amount toward their mortgage. Making this monthly payment helps the homeowner build up equity. It takes the home buyer thirty years (usually) to pay off their mortgage.
Seller financing is very different. The financing comes straight from the seller, rather than from a lender. The financing requirements are set by the seller, who is not beholden to any federal requirements. The homeowner might ask the buyer to produce information about their income and employment stability, but they don't have to. All financing requirements can be negotiated. Closing costs may be less compared to standard home sales. The home buyer can negotiate everything from the size of the down payment to the loan APR.
When the home is purchased, the payments are amortized over 30 years, with a balloon payment due at the end of 5 years. Usually, at the end of five years, home buyers get a traditional mortgage and use that mortgage to pay the seller for the lump-sum payment. If they fail to make the balloon payment at the end of five years, the home buyer may be evicted while losing all money that has thus far been paid toward the home.
2. Seller Financing is Flexible
Seller financing has benefits for a person who cannot get traditional financing from a traditional lender. The primary advantage of seller financing is that it is flexible. With seller financing, buyers with poor credit and little money can still purchase a home, even if they've been shut out of the market by most lenders. In addition, seller financing can be expedited because it doesn't have to go through as many steps as traditional lenders require.
Seller financing can be less expensive, with fewer closing costs, a smaller down payment and a lower APR than traditional mortgage options. Because the same laws do not apply to seller financing arrangements, buyers and sellers have a great deal of flexibility throughout the transaction.
3. Seller Financing Can Be Risky
Many buyers shy away from seller financing because it lacks the safety net of a standard mortgage. People who are unable to make the balloon payment at the end of the 5-year period risk loss of the house. This puts a great deal of pressure on the home buyer to bring up their credit in a relatively short period. It also places the home buyer at the mercy of forces beyond their control. Lending restrictions can vary, depending on the economy and other factors.
When the time comes to get a traditional mortgage, if the buyer cannot qualify, they may be forced to leave the house, losing all money so far put into the house. For this reason, people who can qualify for a traditional mortgage usually apply for a traditional mortgage, even if it means paying a higher APR.
4. Seller Financing Isn't Always a Better Deal
Even though seller financing is more flexible than traditional financing, and sellers can charge a lower APR or require a lower down payment and so on, this doesn't mean that seller financing is always cheaper than traditional financing. Sellers can, and often do, require the same APR as traditional lenders. They can also require a large down payment. Buyers looking for a better deal with seller financing don't always find what they're looking for.
Work With a Capable Real Estate Professional
If you're a home buyer who is considering seller financing, work with a capable real estate professional throughout the process. Negotiation is a critical part of the home buying process, especially when you're seeking seller financing. Work with a real estate agent who can negotiate the best deal possible. Get started with your home buying process today; contact a real estate agent.