As only 60% of families own their home, the rest might like to if they only had the chance.
One of the things that get in the way is the financial hurdles that people must meet to afford even just a down payment on a home. One ways you can get your home sold or get access to a loan with a spotty credit history is with seller financing.
Here are the pros and cons for both buyers and sellers alike.
1. Why Buyers Like It
With seller financing, more people get access to a mortgage. For people who don’t think they’re going to be able to get a mortgage, this can be the way that they get that access. Buyers don’t have to worry as much about their credit score or mistakes they’ve made in the past.
Sellers can approve buyers based on their own criteria. Rather than relying on a bank or a standard lending institution, they can go directly to the seller. It’s hard getting turned down, but seller financing lets buyers get access.
The whole closing process can take weeks. This can turn off some sellers because they might want to close on a home fast and move on with their life. Some sellers stay in limbo while they wait for the close to finish.
Closing is both faster and less expensive when the seller sets the terms of financing.
Also, down payments can be completely different. While it’s traditional to put down 10% on a home, that might not be possible for every buyer. Buyers who need their own arrangement can work with sellers to get the price they’re looking for.
2. Buyer Beware
Seller financing surely has its pros, but it’s not for everyone. Rather than working with a standard financial institution, buyers are limited to terms set out by sellers.
When you get your financing set on the seller’s terms, you don’t get a say on the interest rate. Interest rates from traditional lending are set by banks via terms laid out by the federal government. You’re not subject to those kinds of protections when you go directly to a seller.
You also need to be aware that you might still have your credit checked. Just because they’re an individual seller doesn’t mean they won’t protect themselves. Running a credit check is a pretty standard act for anyone dealing with such a big asset.
Everyone should be entitled to know if they’re dealing with someone who could be a credit risk. They may still work with you, but they reserve the right to know.
If there’s a balloon payment, you’ll need to be able to pay that. Otherwise, you could risk losing out as a buyer.
3. Sellers Have Something to Gain
With this type of financing, sellers can make their home stick out from the crowd. Rather than sitting on a property waiting for the perfect buyer, this can allow sellers to get rid of property faster. With a larger pool of applicants, sellers will have their pick.
Seller financing also allows for homes to be sold “as is.” This is a positive benefit because, when you’re repairing a home in hopes of selling it, you’re cutting down on how much profit you’re really getting. Traditional lenders might even require repairs before they allow a home to be financed.
If you’re a seller working on building wealth, you can get a much higher return by financing to a buyer rather than any other kind of investment. Inflation sits at 3%. Mutual funds might give you 5% or 6%, but you could get 8% from this financing method.
There are also protections for sellers. If a buyer stops making payments on a home, you’re not up the creek. You can get your house back and even keep most of the money that’s been paid at that point.
If you decide you don’t want to deal with collecting for the next several years, you could sell the promissory note and end up getting paid quickly. If you’re willing to take a discount, you could get a big lump sum that you’d never be able to get from selling a home.
4. Sellers Must Protect Themselves
Even though there’s a lot to gain as a seller, you’re always taking a risk when you work outside of traditional financing systems. There are laws in place to protect you, but there are still some ways to get taken advantage of.
You need to own the home outright before you go ahead with financing on your own. Otherwise, you might want to deal with your own lender. They’ll have to approve the deal before moving forward, and if it ends up making more money for you in the end, they might not approve.
While it’s frustrating, your buyer could stop making payments at any point in time. If they default on their loan, they might be embarrassed and just try to disappear. If they stick around, you could be left going through the foreclosure process, and it could cost you hundreds if not thousands.
No matter how culpable your buyer is for the condition that your home ends up in, you might have to pay all the repair costs. If they left things in disarray, you’ll have to deal with the aftermath. Put some money aside each month to prepare for any emergencies related to buyer negligence.
Seller Financing Doesn’t Have to Be Risky
Believe it or not, you can overcome many of the hurdles of selling or buying a home with seller financing. With an adequate background check and a well-negotiated deal, both parties could get what they want without a hassle.
If you want to ensure that your personal finances are in order before you go into this kind of deal, check out our latest guide.