Creative RE Financing
Is seller financing a good option?
By
Sep 12, 2005, 18:43

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.