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Financing

How does the seller determine what rate to provide?

The interest rate on a purchase money note is negotiable, as are the other terms in a seller-financed transaction. To get an idea about what to charge, sellers can check with a lender or mortgage broker to determine current rates on mortgage loans, including second mortgages.

Because sellers, unlike conventional lenders, do not charge loan fees or points, seller-financed costs are generally less than those associated with conventional home loans.

Interest rates are generally influenced by current Treasury bill and certificate of deposit rates.
Understandably, most sellers are not open to making a loan for a lower return than could be invested at a more profitable rate of return elsewhere. So the interest rates they charge may be higher than those on conventional loans, and the length of the loan shorter, anywhere from five to 15 years.

What are the benefits of seller financing?

Seller financing is a viable option when the seller does not immediately need the entire cash equity they have accumulated in the home.

In return for providing financial assistance to the buyer, the seller receives tax benefits, attracts a larger pool of potential buyers, generally completes the sale sooner, and gets good interest earnings.
As for the buyer, seller financing offers less rigid qualification requirements and cost savings by eliminating nearly all loan fees.

Fear of default often makes many sellers reluctant to take back a second note or finance the entire purchase. A thorough credit check should help to dispel many of these fears, although the mortgage also allows the seller to foreclose on the property in case of default.

A seller may also require the buyer to carry hazard insurance on the property and include a due-on-sale clause, a provision in the mortgage note that allows the seller to demand full repayment if the borrower sells the property. Other financing, disclosure and repayment-term requirements also will need to be met.

It is a good idea to consult an attorney when putting together this kind of transaction.

What is a bridge loan?

It is a short-term bank loan of the equity in the home you are selling. You may take out a bridge loan, or interim financing, to help with a knotty situation: closing on the home you are buying before you close on the property you are selling. This loan basically enables you to have a place to live after the closing on the old home.

The key to a bridge loan is having a qualified buyer and a signed contract. Usually, the lender issuing the mortgage loan on the new home will write the interim financing as a personal note due at settlement on the property being sold.

If, however, there is no buyer for the property you have up for sale, most lenders will place a lien on the property, thereby making that bridge loan a kind of second mortgage.

Things to consider: interest rates are high, points are high, and there are costs and fees involved on bridge loans. It may be cheaper to borrow from your 401(K). Actually, any secured loan is acceptable to lenders for the down payment. So if you have stocks or bonds or an insurance policy, you can borrow against them as well.

What is seller financing?

Also known as a purchase money mortgage, it is when the seller agrees to “lend” money to the buyer to purchase and close on the seller’s home. Usually sellers do this when money is tight, interest rates are high or when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.

Seller financing differs from a traditional loan because the seller does not actually give the buyer cash to complete the purchase, as does the lender. Instead, it involves issuing a credit against the purchase price of the home. The buyer executes a promissory note or trust deed in the seller’s favor.

The seller may take back a second note or finance the entire purchase if he owns the home free and clear.

The buyer makes a sizeable down payment and agrees to pay the seller directly every month.