Seller financing
Seller financing is a loan provided by the seller of a property or business to the purchaser. Usually, the purchaser will make some sort of down payment to the seller, and then make installment payments (usually on a monthly basis) over a specified time, at an agreed-upon interest rate, until the loan is fully repaid. In layman's terms, this is when the seller in a transaction offers the buyer a loan rather than the buyer obtaining one from a bank. To a seller, this is an investment in which the return is guaranteed only by the buyer's credit-worthiness or ability and motivation to pay the mortgage. For a buyer it is often beneficial, because he/she may not be able to obtain a loan from a bank. In general, the loan is secured by the property being sold. In the event that the buyer defaults, the property is repossessed or foreclosed on exactly as it would be by a bank.
There are no universal requirements mandated for seller financing. In order to protect both the buyer's and seller's interests, a legally binding purchase agreement should be drawn up with the assistance of an attorney and then signed by both parties.
Secondary market
There is a secondary market for seller financed debt instruments. Many companies and investors look to purchase properly structured debt instruments as investments.
Benefits
Seller/buyer benefits:
- Both the buyer and the seller can make substantial savings in closing costs.
- They can negotiate interest rate, repayment schedule, and other conditions of the loan.
- The buyer can request special conditions for the purchase, such as inclusion of household appliances.
- The borrower does not have to qualify with a loan underwriter.
- There are no PMI insurance premiums unless negotiated.
- The seller can receive a higher yield on his/her investment by receiving equity with interest.
- The seller could negotiate a higher interest rate.
- The seller could negotiate a higher selling price.
- The property could be sold "as is" so there will be no need for repairs.
- The seller could choose which security documents (mortgage, deed of trust, land sales document, etc.) to best secure his/her interest until the loan is paid.
Drawbacks
- The buyer could pay the loan in full but still not receive title due to other encumbrances not divulged by, or unknown to the seller.
- The buyer could make payments faithfully, but the seller might not make payments on any senior financing that may be in place, thus subjecting the property to foreclosure.
- The buyer might not have the protection of a home inspection, mortgage insurance, or an appraisal to ensure that he/she is not paying too much for the property.
- The seller might not get the buyer’s full credit or employment picture, which could make foreclosure more likely.
- Depending upon the security instrument that was used, foreclosure could take up to a year.
- The seller could agree to a small down payment from the buyer to assist in the sale, only to have the buyer abandon the property because of the minimal investment that was at stake.