How Does a Seller-Financed Home Sale Work? | Bad Credit Mortgage ...

Seller-financed home sale refers to a creative financing strategy used when buyers cannot qualify for a conventional mortgage loan. As a real estate investor, I have engaged in a few seller-financed sales over the
?years. However, since the mortgage crisis, I receive phone calls nearly every day from people wanting to buy houses using this strategy.

A seller-financed home sale offers benefits to both buyers and sellers. Buyers are able to purchase a home while engaging in credit repair strategies. Sellers are able to obtain a higher asking price because they carry substantial risk if the deal goes bad.

Essentially, sellers act as the mortgage financier. This doesn?t mean sellers hand over cash to buyers. Instead, they provide credit so the buyer can purchase the property by making payments directly to the seller.

Seller carry back mortgages are not intended to extend for 15 or 30 years like conventional home loans. While the purchase price is amortized in the same manner as banks do, buyers need to work toward restoring credit to qualify for bank financing within a specific timeframe.

The owner will carry home sales I have participated in have extended between 3 and 5 years. Afterward, buyers refinance mortgages through a financial institution to pay off remaining balances.

I require buyers to provide at least 10-percent down payment and assess interest just as a bank would. Sellers are required to abide by state usury laws and prohibited from charging higher interest rates than banks. Buyers should have seller-financed real estate contracts reviewed by a lawyer to ensure compliance and proper recording of property deeds.

Seller-financed loans should be executed with legally-binding contracts of a promissory note and recorded mortgage. Mortgage notes need to include the purchase price, interest rate, down payment amount, monthly installment amount, and default clause. Sellers can initiate foreclosure proceedings if buyers default on loan payments and the default clause outlines the terms that constitute default.

The majority of investors I know only enter into seller-financed home sales when they own the property outright. I follow this protocol as well because banks rarely offer financing when additional risks are attached to the property.

Some investors will engage in this strategy if the buyer?s down payment covers the outstanding balance they owe on the loan. For example, if the seller owes $15,000 on the mortgage note they will require buyers to provide a $15,000 down payment. Funds are used to pay off the note and the trust deed transfer is recorded through the County Recorder?s office.

Several options exist for entering into owner will carry financing. It is best for both parties to work with real estate professionals and determine which option is the smartest choice. Some of the most common seller-financing options include: lease purchase option agreement, land contracts, assumable mortgage, junior mortgage, and all-inclusive mortgage.

Lease purchase option agreements are often referred to as rent-to-own. Buyers provide a down payment and a portion of rental money is contributed toward the purchase price. It is crucial to research state laws regarding lease options, as some states hold buyers financially responsible for outstanding balances if they back out of the deal.

Land contracts are similar to lease options because buyers do not receive the property title until the seller is paid in full. Instead, buyers receive shared ownership to the property via equitable title.

Assumable mortgages allow buyers to take over payments of the seller?s current loan. Assumable mortgages were common during the 50s through 70s, but are not used very often today. When an assumable mortgage is in place the mortgage servicer must grant approval before buyers assume payments.

Junior mortgage requires buyers to obtain bank financing for the majority of the purchase price and the seller carries a second mortgage for the balance. This can be risky for sellers because banks are the top priority for payment if buyers default on the loan and enter into foreclosure.

All-inclusive mortgage means that sellers assume all the risk and carry full financing for the purchase price. Personally, I prefer this method simply because I only engage in owner will carry financing for properties I own outright.

A seller-financed home sale can also be used by private sellers who are not investors. However, it is crucial to understand the pros, cons, and risks of this strategy before entering into a contract. In addition to legal issues, sellers need to be aware of tax consequences and become educated about risk management strategies to ensure the property is protected in the event of default.

Sources:
UsuryLaw.com: State Usury Laws

More from this Contributor:
Understanding Seller Carry Back Trust Deeds for Home Buyers with Bad Credit
How Does ?Owner Will Carry? Financing Work?
Using a Lease Purchase Option Agreement to Buy Real Estate

Article source: http://www.associatedcontent.com/article/8161857/how_does_a_sellerfinanced_home_sale.html

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