Seller financing is certainly an option, as long as the seller knows about
it, of course. With seller financing you will go through a lot fewer hoops of
qualifying than when applying with a mortgage company. Just understand that you
are in fact applying for a mortgage loan except that it's an individual loaning you the money instead of a mortgage lender.
Seller- financed notes will mostly carry higher interest rates than
conventional or government loans. Why? Why wouldn't they? If a buyer approaches
a seller and asks for financing, is there a reason the buyer didn't go to
mortgage lender in the first place? Most likely it's due to a poor credit
situation or hard-to-prove income. If you go for seller financing, be prepared to
show not only some down payment money but also your credit report.
But the rest of the closing process will look similar to one with a
conventional closing. Because it's an individual financing the note, that individual may or may not require the same things a lender would require, such
as title examination, title insurance, or even a flood certificate. Do you want
to know if your new house sits in a flood zone? Of course you do, but unless you
get a flood certificate declaring your flood status, then you won't know. The same
goes for title insurance. Is the seller in fact bringing a clear title to the
closing table? If you have a real estate agent, use him or her to help guide you
through the process, but don't forget about title insurance and legal review.
You want this sale to go through as smoothly as any other. Not only that, but
when you go to sell this property or if you decide to refinance later on, you
too will be asked to provide evidence of clear title, flood zone, and the
property being leally recorded as yours.
Another time to ask for seller financing might be for a second mortgage. For
example, you want to buy a house for $100,000. The lender agree to finance 80%
of the sales price, or $80,000, bit no more, but you only have 5% to put down.
You need to find another 15% to close the deal. Your lender however may not care
that you seek additional funding outside of theirs as long as he combined
loan-to-value ration doesn't exceed 95%. In this instance, you take an $80,000
first mortgage, you put down 5%, or $5,000 and seller agrees to a second note
for the remaining 15%, you just secure an 80-15-5 loan, with the seller
providing the 15%.
Often, sub-prime loans works this way, where lender can allow higher combined
loan-to-value ratios as long as they're only exposed to 80% or so, but they
don't care if you finance the rest of it, all the way to 100% of the sales
price.
Make sure all seller financing is recorded just as with any other loan. Take
precautions as buyer to review the property with an appraisal, inspection, title
report, and flood certificate, and use a seasoned settlement agent to help guide
you through the process when you go to close. Seller financing can be a good
option, but a nightmare if something isn't done properly to transfer ownership.
