Property Futures

Real Estate News, Reviews and Investment

Creative Finance: Seller Financing

Article: explanation of seller financing and why property buyers should consider such an option.

Seller financing is when a loan, required for the purchase of a property, is financed by the seller rather than a traditional lending institution. Typically, the buyer takes over the seller’s mortgage—but there are other options.

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Seller Financing

There are many terms that cover seller financing, including:

  • Owner financing
  • Seller mortgage
  • Assumed mortgage
  • Purchase money mortgage
  • Private mortgage
    • This can include any mortgage not taken out with a financial institution, not just seller financing
  • Partial seller financing
  • Vendor take back mortgage
    • These last are combinations of a mortgage from a conventional lender and a loan from the seller

Seller financing is private contract, typically between two individuals who are not financial institutions or finance professionals. For this reason, it is important to ensure that the contract is drawn up correctly and is fair on both sides.

This form of financing is rare as most people are unaware that such a thing is possible. However, there are a number of options available including:

  • The buyer takes over the seller’s mortgage
  • The seller loans some or all of the value of the property to the buyer
    • This is a form of private mortgage
  • Temporary loan
    • The seller effectively provides a bridge loan or temporary private mortgage which the seller will convert into a conventional mortgage after an agreed period

Advantages and disadvantages for borrowers

 

  • Application is to seller, not a financial institution
    • May accept a buyer who has a poor credit history or other apparent disadvantages
  • Seller may offer a lower interest rate than conventional lenders
  • Seller may offer a higher interest rate than conventional lenders
  • Tax deductions or other benefits may be unavailable
  • May be able to take on a mortgage with a lower rate than is currently available
  • May allow buyers to purchase a property which is beyond their grasp when using conventional financing

Advantages and disadvantages for lenders

 

  • May help sell a property in a down market
  • Typically a high rate of return
  • Borrower may be high risk
  • Will have to foreclose if borrower defaults
  • Seller may have to pay off their mortgage balance without the expected income from the sale of the property
  • May take several years for return to be worthwhile
  • Regular stream of income (as for rental property) but without maintenance costs
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This entry was posted on May 12, 2013 by in Investment and tagged , , , .

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