All About Seller Financing

Seller financing is a very common technique used by the sellers of the property in the US real estate market. It is also known by the name of owner financing or purchase–money mortgage. As the name seller financing suggests, the seller of the property would provide finance to the buyer to enable him organize the necessary funds for purchase. The loan provided by the seller may be in additional to the normal home loan that the buyer may have arranged from a lending institute. The idea is simple, in case the buyer is not eligible for home loan or the amount of loan extended by the lender is not adequate for the purchase, he could rely on the seller to provide him the balance amount required.

There are advantages as well as limitation of this type of financing. Let us look at the advantages enjoyed by the buyer as well as the seller:

• The arrangement between the buyer and seller helps them reduce the closing costs on the transaction
• The buyer of the property may not eligible for home loan but is yet provided an avenue for purchase.
• The buyer does not have to incur expenses on PMI insurance premiums.
• The buyer may be able to avail loan for furniture and accessories contained in the house at the time of purchase.
• The seller of the property enjoys a higher return on his investment.
• The seller may end up receiving a premium over the market price in return of the financing offered to the seller.
• The seller may be able to sell his property on an ‘As-Is” basis without spending anything towards home improvement or necessary repairs.

The seller of the property should assess the credit worthiness of the buyer. He may ask the seller to obtain PMI insurance in order to protect his risk. The seller may also keep the necessary document like the sale deed or the mortgage deed as a protection till he recovers his principal along with interest. All the negotiations can be worked out and finalized by way of an agreement between the buyer and the seller.

 As far as the shortcomings are concerned, these are as under:

•  The buyer of the house faces the risk that even after completion of loan payment to the seller, he may yet not be provided clear title documents. This could be because of certain other loans that the seller may have availed by way of encumbrance of the property which he may not disclose to the buyer.
• Seller of the property faces the risk of foreclosure since he relies on the credit worthiness details furnished by the buyer
• The buyer of the property does not enjoy the services of home inspection or any agency which gives him a fair value of the property, thus he may end up paying an unusually higher amount for his purchase.

A Seller financing transaction needs to carefully handled and negotiated so that it becomes a win-win transaction for the buyer as well as the seller.