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What are the benefits of seller financing?

QUESTION:

I recently had my home for sale and received an offer that would have required me to take a note and mortgage instead of cash. Why would a seller want to do this? Isn’t it risky?

ANSWER:

A buyer, new in town but with otherwise good credit, might not be able to qualify for a loan from normal lending sources.

Also, during times of high interest rates or scarcity of funds from lending companies or banks, a seller may find it advantageous to offer financing to a qualified buyer.

A seller who is able to finance the sale will be able to offer the home to a broader market of buyers. With seller financing there may also be some tax advantage in taking the payment for the house over time rather than in one lump sum. Also, the seller will earn interest on the amount loaned.

A mortgage given by a buyer to a seller to pay for part of the purchase price of the home is called a purchase money mortgage. This is like a mortgage from a regular lending institution except that the processing is easier and the seller rather than the bank becomes the mortgagee.

Usually seller financing is at a lower rate than can be obtained elsewhere. Also the buyer will save many other costs usually charged to process a loan with a bank or mortgage company.

The conventional lender has restrictions on how much money can be lent on real estate, usually 80 to 90 percent of value. However, the seller-lender can lend as much as she dares and at any rate she can get (subject to limits imposed by usury laws).

When financing their own sales, sellers should be guided by the same principles of good business as followed by the conventional lenders. Look at the buyer’s credit report to determine how well the buyer handles his finances. Require a sufficient down payment or other conditions to assure the buyer will want to protect his investment.

Seller financing allows more creativity in structuring the sale. Yes, there is always a risk to the seller. However, if done with careful thought and foresight, the risk can be reduced and the transaction can be advantageous to both the buyer and the seller.

This information is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.

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