Owner Financing - aka "Seller Financing"
How does it work in a home sale?
QUESTION:
As homes in Utah have come back down to an affordable level, I have been looking at making my first real estate purchase. Unfortunately, I have a few dings on my credit and only a moderate (but adequate) income. I have seen “Seller Financing” advertised on a number of different properties, and have heard that it does not require a conventional credit approval. What exactly is “Seller Financing,” and can it help me?
ANSWER:
Though seller financing has a history of being rare, given the current mortgage crisis and increasingly stringent loan requirements, it has emerged as a somewhat viable option for many sellers that want to be able to market their properties to buyers that can’t qualify for a conventional loan. Another reason sellers might consider financing a home is because they want to spread out the income from the sale over a number of years (for tax purposes). Currently in Utah, approximately 3.5% of the homes in the Salt Lake City area are being actively marketed with ‘Seller Financing’ as an option. (At the time this article was written, the exact number was 344 out of 9484 Active properties in Salt Lake County). Odds are that one of those homes would fit the bill for just about any price range a buyer was looking at.
SO HOW DOES IT WORK?
The process is easy. You, the buyer, will sign a promissory note (promising to repay the loan) and either a mortgage or a deed of trust (which will allow the seller to foreclose on the home if you default – the document basically states: “If you pay…You stay! If you don’t… You won’t!”) The seller will then transfer the title into your name, which allows you to sell or refinance the home at your discretion. You must, of course, continue to make the agreed upon payments to the seller.
Alternatively, there is a less popular option in which the seller retains title to the property until you have paid off the loan. The title of the property is not transferred until the loan has been paid in full (payments are made in installments similar to a conventional loan). Because the seller retains title over the life of the loan, you cannot sell or refinance the property until it has been paid off. This is the reason for the obvious unpopularity of these contracts. They are known by various names, including “Contract for Deed,” “Contract of Sale,” “Land Sale Contract,” or “Installment Sales Contract.”
WHY IS IT SO RARE?
In general, two obstacles will stand in the way of coming to terms on seller financing. The first is called the “Due on Sale” clause that most mortgage companies include in their loan documents. Basically, the clause states that if the homeowner sells the property (or transfers the title) the full amount of the loan is due to be paid immediately. Thus, unless the seller owns the property free-and-clear, they may not be able to finance it because of their contractual obligation to the current lien holder. The second obstacle is the fact that most sellers want their money up front and don’t want to be hassled with collecting a monthly mortgage payment. This is understandable given that most people sell their homes because they are moving into another one, and they need the equity for a down payment or repairs.
So, to answer the question of why seller financing is so rare: Sellers either can’t owner finance, or they simply don’t want to…
THE TAKE HOME MESSAGE…
Despite their relative scarcity (compared to conventional sales), there are always Seller Financing opportunities to be had (as is apparent with the 344 properties that are currently being offered with SF available). If you are concerned that you may not qualify for a classic mortgage, don’t give up hope. We can help you to explore the world of Seller Financing and find a home sooner rather than later. Feel free to contact us and request a list of owner financed properties.