Buying a house is a significant investment that, for some, feels like an unattainable goal due to various reasons, such as poor credit, insufficient down payment, difficulty getting approved for a mortgage, etc. This is why some buyers look to buy a house financed by the seller.
What Is Seller Financing?
Seller financing refers to a credit extended by the seller to the buyer to cover part or all of the purchase price. Simply put, the seller offers a loan to the buyer, and the buyer makes payments over time instead of paying the total amount upfront.
This arrangement can be a win-win for both parties, as the buyer gets to buy their dream home, which they might not otherwise have been able to afford, and the seller receives a steady income stream while also potentially selling the property at a higher price than they would have gotten in a traditional sale.
The 3 Main Types of Seller Financing
Seller financing is not a one-size-fits-all solution. There are several types of seller financing, each with its advantages and disadvantages. It’s essential to understand the differences between the various types to find the best option for your situation.
- Land Contract
A land contract is an agreement where the seller retains ownership of the property until the buyer makes the final payment.
- Lease Purchase
Also referred to as a rent-to-own contract, a lease purchase is where the seller leases the property to the buyer with an option to buy it at a predetermined price and within a specified timeframe. The buyer usually pays a non-refundable option fee, which is around 1% to 5% of the purchase price, to secure the option of buying the property.
- Wraparound Mortgage
A wraparound mortgage is a type of financing where the seller combines their property’s existing mortgage with a new one. The buyer makes monthly payments to the seller, who then uses a portion of that payment to pay the original mortgage lender. The remainder of the payment goes to the seller, who keeps the difference as profit. The seller essentially becomes the lender for the buyer, and the original mortgage is still in place, with the seller assuming responsibility for making payments on it.
For instance, let’s say a house is being sold for $300,000 and has an existing mortgage of $200,000. The buyer could obtain a new mortgage from the seller for $300,000, with the seller using $200,000 of that to pay off the existing mortgage. The buyer would then make a monthly payment to the seller, who would keep the difference between the payment received and the payment made to the original mortgage lender.
Steps To Buying a House Financed By The Seller?
If you’ve decided seller financing is the right choice, here are the key steps to ensure a successful transaction.
Step 1 – The first step is to find the house you wish to buy with a seller ready to finance the purchase. Once you’ve found a house that meets your needs and budget, discuss the financing options with the seller.
Step 2 – Though you’re pursuing seller financing, it’s a good idea to get pre-approved for a mortgage from a traditional lender. This will give you a good understanding of how much house and mortgage you can afford and show the seller that you’re a serious buyer.
Step 3 – Before finalizing the purchase, conduct due diligence on the property to ensure that it’s in good condition and that there are no liens or other legal issues that could affect the sale. You might want to consider hiring a professional inspector to examine the property and review all relevant documents.
Step 4 – Once the due diligence is done and you are satisfied with the property, it’s time to draft and sign the purchase agreement. This agreement should include all the terms and conditions of the sale, including the sales price, terms of payment, interest rate, and other relevant details.
The Advantages of Buying A House Financed By The Seller?
Seller financing comes with sever advantages, which is what makes it an attractive option for many buyers. Here are a few notable benefits of buying a house financed by the seller.
- With seller financing, you don’t have to worry about getting approved for a mortgage from a traditional lender. This can be a huge advantage if you have a poor credit history or don’t meet the income requirements of traditional lenders.
- Buying a house financed by the seller offers more flexibility in terms of payment schedules, interest rates, and down payments. You also get to negotiate terms that work better for your financial situation and budget.
- Traditional mortgages often take several weeks or even months to close. But with seller financing, the closing process is much faster, which can be a significant advantage if you’re in a hurry to move into your new home.
- Since there’s no need to pay traditional appraisal or mortgage origination fees, the closing costs can be significantly lower. In addition, you also get to save on the purchase price. Here’s how.
Let’s say you find a home with a listing price of $300,000, but you can only afford a down payment of $30,000. In this case, you can approach the seller and propose a deal where the seller agrees to finance the remaining $270,000 over a period of 20 years with a fixed interest rate of 5%.
Under this arrangement, you would make monthly payments of $1,821.45 to the seller, which includes principal and interest. This monthly payment is lower than what you would have paid if you had taken out a traditional mortgage.
The Disadvantages of Buying a House Financed By the Seller?
While there are several advantages to buying a house financed by the seller, there are some risks involved. Here are a few potential drawbacks to consider:
- Seller financing typically comes with higher interest rates than traditional mortgages. This is because the seller is taking on more risk by financing the purchase themselves.
- Some seller financing agreements require a large balloon payment at the end of the loan term. This can be a significant financial burden, especially if you haven’t saved enough to make the payment.
- If you default on a seller financing agreement, the seller has the right to cancel the deal, take back the property, and keep any payments you’ve already made. This can result in the loss of money and the property itself.
- Seller financing agreements may not offer the same legal protections as traditional mortgages. This means you may have less recourse if something goes wrong with the purchase.
- Not all sellers offer to finance, so your options may be limited if you only consider properties with seller financing.
Is Seller Financing the Right Option?
Offering more flexibility, faster closing times, and more negotiating power, buying a house financed by the seller can be an attractive option for many buyers. However, it’s essential to carefully consider the risks involved and review the terms of any seller financing agreement before making a purchase. Consider working with a real estate attorney to get more insights into additional legal protection and ensure the agreement is sound.
Contact Jackie Ruden Realty Team
Give us a call today at (435) 272-7710 to set up a time to discuss your current and future real estate goals in regards to buying a home or buying a property in trust. We look forward to working with you to make your goals a reality.