Seller-financed Mortgage: A loan provided by the seller of a property to the buyer.
Seller-financed Mortgage: A loan provided by the seller of a property who takes on the role of the bank and extends enough credit to the buyer for the purchase price of the home.
Seller-Financed Mortgage: An Option For Buyers With Bad Credit
A seller-financed mortgage is an alternate way to finance the purchase of a property. With a seller-financed mortgage, the owner of the home also provides the financing. This type of mortgage transaction is common when the buyer cannot access other forms of financing.
A seller-financed mortgage is an agreement between a homeowner and a buyer in which the buyer agrees to make monthly mortgage payments to the seller until the mortgage is paid off. The terms of the mortgage are agreed upon by the buyer and seller.
According to Texas attorney Eric Days, “The buyer and seller then execute typical mortgage transaction documents including a promissory note (containing the terms of the loan). In Texas, they record a deed of trust in the county property records. The buyer then pays the seller according to the loan terms over time, typically with interest. Frequently seller financed loans are often short term — for example, amortized over a typical mortgage period of 15 or 30 years but with a balloon payment due in five years.”
The financial crisis of 2007 saw home values drop dramatically, which limited access to mortgages for people with low credit ratings. Seller-financed mortgages became a way for people with a less than stellar credit history to buy a home.
Seller-financed mortgages do not reflect inferior quality homes or homes sold at below cost. Although they tend to be more beneficial to the buyer than the seller, given that the seller will have to wait years to collect the full amount, the upside is that the seller can expect to charge a higher interest rate for the mortgage loan.
In the current housing market, there are few homes that are free and clear and can be seller-financed. Those properties that are available to be sold with seller financing may require a considerable down payment and a credit report from the buyer. The buyer will also have to demand proof of ownership rights when the mortgage is finally paid off. A seller-financed home purchase transaction entails significant negotiation about insurance, taxes and title insurance.
“A seller is in the best position to offer a seller financing deal when the home is free and clear of a mortgage — that is, when the seller’s own mortgage is paid off or can, at least, be paid off using the buyer’s down payment. If the seller still has a sizable mortgage on the property, the seller’s existing lender must agree to the transaction. In a tight credit market, risk-averse lenders are rarely willing to take on that extra risk,” Days says.
Though the federal government does regulate mortgage financing for banks and servicers, seller financing is generally exempt from these regulations.
“Property owners may engage in seller financing with immediate members of their family, defined as a spouse, child, sibling, parent, grandparent, grandchild, the spouse of any of the foregoing, and includes stepparents, stepchildren, stepsiblings and adoptive relationships, or for the sale of their personal residence without needing to be licensed as a mortgage loan originator,” says the North Carolina Real Estate Commission.
“However, a seller, in offering owner financing, may not misrepresent the terms of the financing, nor charge interest above that permitted by law, nor impose a prepayment penalty for early payoff if the principal amount of the loan is less than $150,000, nor fail to timely pay escrowed taxes or homeowner’s insurance, etc.”
Buyers and sellers entering into a seller-financed mortgage agreement are advised to consult with an attorney before the sale is finalized.