Real Estate For Fun And Profit

Seller financing works just like a regular mortgage, except the seller is "lending" to the buyer. No money passes hands – the buyer has to make payments to the seller until the agreed upon mortgage is paid off.

Since this is a slow housing market, many sellers are offering seller financing to get people who many not qualify for a regular home mortgage to buy their home. In many cases, it is just as safe as buying a home with a regular mortgage. In some cases it is not.

NEVER purchase a seller-financed home that already has a mortgage on it. This is a bad idea – if the seller does not make payments to that mortgage, then the house can be foreclosed on by the current mortgage holder.

Be sure to have yourself placed on the deed of the home as the new homeowner. This should be treated just like a regular home purchase, mean ing you should have a title search done on the home, and you need to use an escrow closing service.

Good luck.

This more then likely means the have a lender for you. The may also finance it themselves and act as a bank. It’s up to you, you choose how you want to finance it not them.

I work for NoteWorld, a third party processor for seller finance transactions (we process payment between buyer and seller – we don’t have anything to do with money lending), and I think your question is one that people are asking more and more in today’s market. T Taylor and Dawni make some good points, and I’d just like to elaborate on a few things. Seller financing is usually used by homeowners that either own their property outright, or have substantial equity in it. So if you wanted to take advantage of this as a buyer, there are multiple scenarios:

Scenario 1: The house you want is $300,000 and you can only get bank financing to $250,000, then the current owner of the house would carry back the remainder of the loan. So you would be paying a mortgage on the $250,000 to the bank, along with monthly payments for the $50,000 to the owner for the balance.

The terms between buyer and owner are unique and have nothing to do with the bank mortgage; it’s a private contract between individuals.

Scenario 2: You don’t qualify for traditional financing at all, and need the owner to carry back the full amount of the cost of the house – $300,000. Like in the above scenario, you and the owner come to terms and you begin making payments.

If, for some reason, you are unable or unwilling to continue to pay the loan, the owner has the option of either foreclosing on the house, or selling the note. Selling a note in a situation like this is like cutting loses…the owner cashes out the remaining debt owed for a certain number of pennies on the dollar and gets a lump sum, and the buyer of the note (usually a bank) begins receiving payment from the buyer.

The pros for buyers who take advantage of seller financing is negotiable terms and conditions as well as not needing bank/credit approval to purchase a home. Also, making steady payments on your home will help raise your credit score if your payment is processed through a third party that reports to the credit bureaus.

The cons for buyers can include high balloon payments at the end of the loan and higher interest rates than typically found at banks.

It really depends on the terms that buyer and seller agree upon, so always remember to do your research and read everything thoroughly before you sign.

Hope this helps!

Make sure they own it and aren’t selling to you will in debt on your house. Otherwise they can collect your payments and not pay their lender and have the house foreclosed.
I have bought and sold land on contract without issues. My dad sold houses on contracts without problems but he didn’t still owe on them. He got a high interest rate so it was great for him. If I had a paid off house and sold it to put the money in savings at 3% I would rather carry a mortgage at 7%.
If you didn’t pay I would foreclose just like a bank. If I sold it for more than you owed I would deduct all cost and give you the change.

Seller financing, lease to own, rent to own, owner carry – all essentially the same dog, different chain.

One huge downfall, if the seller has a mortgage, stops paying it and the lender forecloses, you are out of the house and would probably have to sue to get anything back, if there is anything to get.

What typically happens is that the owner writes a contract to protect the property, which they should. However, some write very challenging contracts to fulfill, you either inadvertantly or blatantly make a mistake, you are out, they keep your deposit and you have essentially rented the property for nothing. Then they find the next tenant.

One of the more ridiculous examples of this I have heard recently, the leasee cut back some branches of a tree that were rubbing on the house. The owner trotted out the contract that showed that no landscaping would be trimmed without the owners permission. He terminated the contract, booted the people out, kept their deposit and all their payments.

Not all owners are that unscrupulous, most some are.

So,if you are going to do this, make sure you have your attorney review the contract. It is worth every penny you pay.

If a seller has an existing mortgage or loan with a bank, the owner financing will most likely not be allowed. Most mortgage deeds have a "due on sale" clause which makes their loan due upon the transfer or sale.

If the seller has an existing owner contract they are still paying on & your new owner contract will "wrap" the existing, you can stipulate that all payments be made to a contract collection agency. They will accept your payment, them make the seller’s payment & then send the seller what’s left over. They also make all the required filings with the IRS.

If the seller does have an existing and you will be wrapping loans, please obtain a copy of the seller’s existing and make sure there is not a balloon payment due. That is about the only risk I see, so long as you use a contract collection agency.

Often a win-win for both parties. You still get to deduct the mortgage interest & the seller only has to report income & what portion of principal that would be capital gain (if any) each year. Plus you don’t have to come up with an additional 3% for closing costs for loan fees.