What is seller
financing?
Seller financing
is when a seller helps to finance a real estate transaction by taking back a
second note or even financing the entire purchase if the seller owns the home
free and clear. Usually sellers do this 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 give the buyer cash
to complete the purchase, as does a lender. Instead, it involves extending a
credit against the purchase price of the home while the buyer executes a
promissory note and trust deed in the seller's favor. These special
circumstances must be acceptable to the lender who makes the first mortgage on
the property.
The necessary
paperwork is prepared by the title or escrow company after the terms are worked
out between the buyer and seller.
If you are a
seller considering such an arrangement, it is critical to thoroughly evaluate
the creditworthiness of the buyer first. Fear of default makes many sellers
reluctant to take back a second. But seller financing can bring a higher price
plus complete the sale sooner in some situations. For more information, contact
the Internal Revenue Service for a copy of its Publication 537,
"Installment Sales." Order by calling (800) TAX-FORM.
What are the
benefits of seller financing?
Seller financing
offers tax breaks for sellers and alternative financing for buyers who can't
qualify for conventional loans.
If you are a
seller, the risks you face are the same as those facing any lender: Is the
borrower a good credit risk? Will the property hold enough value over time to
allow for the repayment of all loans made against it?
You should run a
full credit check on the borrower, require hazard insurance on the property and
include a due-on-sale clause. There also are financing, disclosure and
repayment-term requirements that need to be met. It is wise to consult a lawyer
when putting together this kind of transaction.
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