FUNDAMENTALS
TRANSACTIONS
Seller Financing and How to Use It
WHEN A MORTGAGE ALTERNATIVE CAN WORK FOR YOU
by Michael Jordan
ince a house is probably one of the largest invest- ments a person makes, over the years, sellers and
containing the terms of the loan. A mortgage or deed of trust is also drafted with the property description. Over time, the buyer pays back the loan plus interest. To avoid confusion, this is NOT a rent-to-own agreement. In a seller financing deal, the deed is transferred to the buy - er as soon as the contract is agreed upon. This makes them responsible for paying the remainder of the loan to the sell- er. A rent-to-own deal merely gives the option for the buyer to purchase the home at a certain date. The homeowner is still the legal owner of the property, until the buyer (or tenant) decides to finally purchase the property. Seller financing loans are usually short term. This means that instead of a duration of 15-30 years, as a tra- ditional mortgage, seller financing loans are usually five years duration, with a balloon payment at the end. The buyer will make monthly payments for five years. At the end of the five years, the balance is due. The idea is that the property has gained enough value within a few years, and the buyer is in a better financial position to refinance through a traditional bank, or mortgage company. This will allow them to pay off the seller-financed loan.
S
lenders have devised several ways to assist a buyer in financing the purchase. It is common for buyers to apply for some sort of residential mortgage to fund their pur- chase, but there are times when it isn’t possible for a buy- er to secure a traditional mortgage. That is where Seller Financing steps in. Seller financing is an option offered by sellers that allows the buyer to purchase the property directly from the property owner. To be clear, the seller does not hand over money to the buyer, like what a bank, or mortgage company does. Instead, they extend enough credit to the buyer to cover the purchase price of their property (less any down payment) and the buyer makes regular pay- ments until the amount is paid in full.
MECHANICS In seller financing, the seller functions as the lender in the sales transaction. Both parties sign a promissory note
54 | think realty magazine :: october 2020
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