In my last blog on seller financing, I basically outlined the benefit to the seller. Now I want to outline some the pros and cons to the Buyer via seller/owner financing.
Seller/owner financing lets people who might not be able to secure a mortgage to buy a home. A seller might OK you even if a bank or other traditional lender turned you down.
You have a faster closing as there is no waiting for the bank loan officer or a legal department to process and approve your application. I am currently dealing with a lender that has yet approved my buyer and we are now in the third month.
In addition, your closing costs are cheaper as you have no bank or mortgage origination fees to pay. You may even save on appraisal costs. You down payment can be flexible but not so with a traditional lender.
Just as there are pros to seller financing for the buyer, there are also cons you need to be aware of. For example, the interest rate you pay will probably be higher than what you’d pay to a bank/lender. Why? Because you are to a degree a risk to the seller. Do you remember the old investing rule: the higher the risk, the higher the rate of return should be. The same here with seller/owner financing.
In some cases, the seller still wants to “approve you” by way of documentation, viz., credit report, employment history, income, etc... Just because the seller is not a bank doesn't mean he or she won't run a credit check on you. You could be turned down if you're a credit risk. If you don't pay your bills in a timely manner, seller financing may not be for you.
If the seller has a mortgage on the property, his bank or lender may/can demand immediate payment of the debt in full if the house is sold to you. This is because most mortgages have “Due on Sale” clauses, and if the lender isn’t paid, the bank can foreclose. To avoid this risk, make sure the seller owns the house free and clear, or that the seller’s lender agrees to owner financing.
What about balloon payments? With many owner financing arrangements, a large balloon payment may become due after five years or maybe sooner. If you can’t secure financing by then, you could lose all the money you’ve paid so far, plus the house. You need to ensure you can pay the balloon payment.
Some states prohibit balloon payments. In checking with Robert May, a local real estate attorney with Banzet, Thompson, Styers & May, PLLC in Warrenton, NC, about North Carolina’s prohibition, if any, on balloon payments, this is what he said,
“There isn’t an absolute prohibition – there are certain circumstances, 3 that I’ve been able to find, where a balloon payment is allowed for a high-cost mortgage:
The payment schedule is adjusted to accommodate the consumer’s seasonal or irregular income.
The loan is a short-term bridge loan (12 months or less) to finance a new home purchase for a consumer selling an existing home.
The creditor meets criteria for serving a predominantly rural or under served area, and the loan meets specific criteria set forth in the Bureau’s Ability-to Repay/Qualified Mortgage Rule.”
Please check with your own state regulators regarding balloon payments.
In summary, seller or owner financing is a financial arrangement in which buyers make payments directly to the seller rather than acquire a mortgage from a financial institution. Payments are usually in the form of monthly installments of principal and interest. Sellers benefit by getting monthly principal and interest income along with a potentially higher selling price and a quicker sale. Buyers can purchase a home that traditional lenders would not currently approve.
If you would like to discuss “seller/owner financing,” to see if it might meet your needs or just have questions in general, give us a call at 252-257-4822 or visit our website at www.cansellnow.com