10 Oct Seller Financing in Simple Explanation
Seller Financing: What is it?
Since there is less knowledge about seller financing, this article aims to educate those who want to go into seller financing business. There are many sellers of commercial and residential home that take the role as a private lender.
For those who are not familiar with seller financing, here is some information you might want to know.
Seller Financing Different Types
1. All-Inclusive Mortgage. It is what lender called AITID where the sellers would finance the promissory note and the mortgage of the whole balance of the house and land price minus the downpayment.
2. Junior Mortgage. As of the present moment, many private lenders are hesitant to finance the whole value of the home. That is why most seller extends the credit of the buyer which is called the junior mortgage or the second for the balance in the price of the sale. However, the risk here is that the second mortgage lender is at a lower priority should the borrower skips paying the note or turn into foreclosure. It means that the junior mortgage is paid off only after the first mortgage is paid off from the sale.
3. Land Owner. IT means that the title of the home is not given to the buyer, but it will be an “equitable title” This is shared ownership of the buyer and seller until the loan is paid. After the final payment is paid, the deed will be passed to the buyer.
4. Lease Option. This type the property of the seller is a lease to the buyer for the specific, and in return of the upfront fee, the seller will sell the property in the specific date in the future. Information should be written in an agreement, including the price. Some or all the fee from the rental can be credited tot he purchasing price of the property.
5. Assumable mortgage. This type allows the buyer to assume the property of the seller from the existing mortgage. Some of the assumable mortgage rates are adjusted with the bank’s approval.
Seller Financing: Reducing Seller’s Risk
1. The seller should insist on requiring a loan application. It means that the buyer must complete a loan application form and verify the information entered by the buyer. This will include credit history, employment, assets, financial status, and other vital documents.
2. Allow the sellers approval. The written contract which has specific terms about the loan such as the terms and interest rates should seek a seller’s approval based on the financial status of the buyer.
3. Get Downpayment. The seller should ask for downpayment to reduce the risk of losing investment from the buyer. The risk is reduced because it is likely for the buyer to walk away from the money they put down for the loan property.