Seller financed real estate deals are a good mortgage alternative when buying or selling a home. But, should you opt for it?
Most real estate transactions follow a regular process. The seller finds an adequate buyer with a good credit score, required income, and good employment history, who then asks a lending company to borrow money required for the house financing – or rather, a mortgage.
But, this isn’t always possible. Sometimes a slight mistake might cause you to lose the possibility to apply for a mortgage, and this might sound like it’s game over for your chances of becoming a house owner anytime soon.
Fortunately, there are some alternative financing methods, and seller financed real estate deals – also known as owner financed – are among them. As you might’ve guessed from the name, this means that the person selling a home is providing finances for the home purchase.
How Do Seller Financed Deals Work?
When you agree to do seller financed real estate deals, you don’t involve the bank in the process. Rather, the buyer and the seller agree on details such as the interest rate, schedule of payments, and the consequences in case the buyer doesn’t fulfill their part of the arrangement. Then, they draw out a promissory note.
Lower Closing Costs
In seller financed real estate deals, closing costs are cheaper than in traditional sales, because there are no origination fees and other bank-made chargers. Also, there is greater flexibility about the repayment terms.
When you sell or buy using seller financing, you can expect to close much faster than with regular mortgage. This is because seller financing is completed without the strict bank paperwork and procedures, so you don’t have to wait for all the background checks and documentation. You simply make a written agreement, sign it, and proceed with the financing.
They’re Good for People Who Cannot Get a Mortgage
Unfortunately, not everyone can get a mortgage. This doesn’t necessarily mean that that person is bad or irresponsible. Everyone makes mistakes and slip-ups happen. Unfortunately, this can sometimes cost you the opportunity to become a house owner. Seller financed deals are great for these people.
Home buyers shouldn’t expect to get better terms in a seller financed deal than if they would during a mortgage. This is because the seller has to count in on the possibility that the buyer won’t be able to meet their terms. Still, you can still expect to pay a lower interest – although this doesn’t mean good terms.
There Is No Guarantee the Debt Will Be Repaid
Unfortunately, there is a reason why the buyer couldn’t get a regular mortgage. This makes the deal at least a bit risky. While the promissory note provides a type of security, it isn’t the same as if the deal was made with the bank, and there is always the chance that the buyer won’t be able to repay the debt, which can lead to trouble.
Should You Agree to a Seller Financed Deal?
The truth is, only you can know whether or not it’s a good idea to ask or agree to a seller financed deal.
If you’re a buyer, think well if you’re capable of meeting the seller’s terms, and if you truly can repay the debt. Sometimes it can be better to wait a few more years until your credit score improves and to get a better deal with traditional mortgage.
On the other hand, sellers need to consider the possibility that the buyer might struggle with repaying the loan, and so they should make sure that the promissory note protects them.
Overall, you really need to consult your lawyer before making a final decision.