Written by Rick Smith: Current rates and information on mortgage loans, additional information on home loans to buy a home
Now that the days of loose lending are gone, creative seller financing is poised to make a comeback. Home sellers are exploring ways to attract more buyers, rather than let their property languish on the market. Seller financing may provide a lift to home sales, as well as a good opportunity for home buyers.
Financing can be a First Mortgage or a Second Mortgage:
A first mortgage lien can be offered by the seller if the property is owned free and clear, or the seller has a small existing mortgage that will be paid off at the close of the transaction.
A second mortgage can be offered to help a buyer get a first mortgage at 80% loan to value, or less, which makes it easier to qualify, and eliminates the need for mortgage insurance.
For home sales with a higher price, seller financing could reduce the loan amount of the first mortgage to the conforming loan limit, which provides the buyer with a lower interest rate, and easier qualifying guidelines than a jumbo loan.
A second mortgage can also be used as a wrap around loan, where the seller maintains their existing first mortgage, and creates a new second mortgage, offering one payment to the buyer.
Regarding a wrap around loan, which is also known as an all inclusive trust deed, the buyer and seller should be aware that many loan documents have a due on sale clause that says the lender has the right to call the loan due if the property is transferred. Considering market conditions, lenders may not choose to exercise that option if the mortgage remains in good standing.
Both the Home Buyer and Home Seller can Benefit:
Seller financing allows the parties to negotiate the interest rate and the repayment schedule. As compensation for helping the buyer with financing, the seller could receive a higher priced sales offer, and a higher rate of interest than they would from other investments. Also, the mortgage note carried by the seller would have a cash value, which could be sold to another investor.
Strict lending guidelines can prevent some good borrowers from buying a home. Seller financing could provide an opportunity for more buyers and sellers to negotiate a mutually beneficial transaction. Buyers could get into a home when they otherwise may not qualify, and home sellers could receive a quick home sale, at a fair price, with a good rate of return on investment.
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