Pros and Cons of Financing as Seller

Seller financing can benefit both parties in a home sale despite the natural risks. This is essentially taking out the middle man, and middle men do the work no one really wants to do. If you can shoulder the burden, do it and get rid of the third party.

Who wouldn’t want the banks and mortgage lenders out of the picture if they could be? It’s probably people who don’t know what they’re doing, which is most people. Shouldering the financing does involve risk.

Seller financing is when the seller is the lender in the transaction. The seller doesn’t just give the buyer money in the form of a loan like the banks and mortgage lenders do. The seller allows the buyer to make payments. They might let them rent first, and if they record is clean, and then they can buy. Now though, the expenses of property taxes, homeowner insurance, and maintenance then fall on the buyer.

The buyer almost always signs a promissory note to the seller listing the interest rate, repayment schedule, and default consequences. These are usually short-term deals. Sellers don’t want to be dealing with this for 30 years. The loan is usually amortized for 30 years with a balloon payment after the first five years, this would be the standard deal for seller financing. Balloon payments are the repayment of the left over principal sum, made at the end of a loan period.

                Pros for buyers:

  • People who cannot get a mortgage are able to buy a home though seller financing. A seller might give you the green light when a traditional lender would not.
  • Closing process is much faster and cheaper.
  • A down payment can be whatever is agreed upon.

Cons for the buyer:

  • Interest rates might be sky high.
  • A credit check will still be run on you even though the lender isn’t a real bank. You still have the potential to be turned down.
  • You need to ensure the balloon payment can be repaid.

Pros for the seller:

  • If selling your home has been difficult, this option could make it go faster. .
  • Selling the house “as is” is an option instead of making costly repairs and improvements.
  • You might be able to get a better interest rate than you cold from other investments.
  • Selling the promissory note right away to an investor will give you a lump-sum of cash.

Cons for the seller:

  • It is best to own the home completely. If you do not, you will need approval from your lender before proceeding with the deal.
  • The buyer can back out and stop payments at any time. The buyer can just walk away or go through the foreclosure process, which can take months and be costly.
  • Repair costs could become an issue if you need to take back to the house for any reasons.
  • Taxes become much more complicated.

If you are a buyer or a seller, be sure to hire a real estate attorney. They are good for reading and explaining contracts, as well as writing promissory notes. Sellers need to run credit checks and look through the references. If you are a seller, you need to get a down payment from the buyer. This will put a vice on the buyer if they think about walking away. Speak to a tax CPA about the tax benefits of selling with personal financing. And as a buyer with a poor credit score, raise your score before the balloon payment is due.


Best of luck!

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