Seller financing can be a great option for those looking to purchase a home in Texas, but it’s important to understand the process before moving forward. With this post, we’ll take a closer look at what seller financing involves, who it benefits, and how it works.
What is Seller Financing?
Seller financing is an alternative type of real estate transaction that allows the buyer to borrow funds from the seller instead of a bank or other financial institution. The buyer agrees to make periodic payments to the seller while the seller holds title to the property until the loan is paid off.
Homeowners anxious to sell often consider seller financing, including taking back a second note or financing the entire purchase if the seller owns the home free and clear.
Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase. Instead, it involves extending a credit against the home’s purchase price while the buyer executes a promissory note and trust deed in the seller’s favor. These special circumstances must be acceptable to the lender who makes the first mortgage on the property.
The title or escrow company prepares the necessary paperwork after the terms are worked out between the buyer and seller.
It is critical to evaluate the creditworthiness of the buyer first thoroughly. Fear of default makes many sellers reluctant to take back a second. But seller financing can bring a higher price plus complete the sale sooner in some situations.
Resources:
- IRS Publication 537, “Installment Sales.” Order by calling (800) TAX-FORM.
What are the benefits of seller financing?
Seller financing benefits both buyers and sellers, including tax breaks for the seller and offering an alternative when conventional loans can’t be found.
The risks involved are the same risks facing any lender. Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans against it?
Sellers should run a full credit check on the borrower, require property hazard insurance, and include a due-on-sale clause. Financing, disclosure, and repayment-term requirements should also be met.
How Does Seller Financing Work?
When a seller decides to finance a sale, they typically set up a contract in which the buyer agrees to repay them in pre-determined installments. Depending on the terms of the agreement, the buyer may be required to make a down payment, as well as annual payments with interest at a fixed rate or variable rate. To protect both parties involved, it’s important to work with an attorney and conduct due diligence to ensure all parties understand the legal implications of the contract.
How are the rates set for seller financing?
The interest rate on an owner-carry loan is negotiable. Ask your agent to check with a lender or mortgage broker to determine the current rate on institutional first (or second) loans.
Seller financing typically costs less than conventional financing because loan fees (points) typically aren’t charged. The current Treasury bill and certificate of deposit rates will also influence the interest rate on a seller-carry loan. Sellers usually aren’t willing to carry a loan for a lower return than they would earn if their money were invested elsewhere.
What Are the Risks of Seller Financing?
While seller financing can be beneficial, there’s always risk involved. As a seller, there’s always a chance that the buyer won’t make their payments on time or default on the loan altogether. In this case, you could risk losing your security deposit (if you accepted one from the buyer). You should also know that seller financing can complicate tax issues and other legal matters.
Should I Consider Seller Financing?
Whether or not you should consider seller financing depends on your individual situation. Be sure to research and consult an experienced real estate professional before deciding whether or not it’s right for you. With proper planning and precautions, seller financing can be a great opportunity for buyers and sellers!
