Seller Financing
How are the rates set for seller financing?
The interest rate on an owner-carry loan
is negotiable. Ask your agent to check with a lender or mortgage broker
to determine the current rate on institutional first (or second) loans.
Seller financing typically costs less than conventional financing
because loan fees (points) typically aren't charged. The interest
rate on a seller-carry loan will also be influenced by current Treasury
bill and certificate of deposit rates. Sellers usually aren't willing
to carry a loan for a lower return than they would earn if their money
was invested elsewhere.
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What are the benefits of seller financing?
Seller financing offers benefits to both
buyers and sellers including tax breaks for the seller as well as
offering an alternative when conventional loans can't be found.
The risks involved are the same risks facing any lender. Is the
borrower a good credit risk? Will the property hold enough value
over time to allow for the repayment of all loans made against it?
Sellers should run a full credit check on the borrower, require
hazard insurance on the property and include a due-on-sale clause.
There also are financing, disclosure and repayment-term requirements
that should be met.
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What is seller financing?
Homeowners who are anxious to sell often
consider seller financing, which may include taking back a second
note or even financing the entire purchase if the seller owns the
home free and clear.
Seller financing differs from a traditional loan because the seller
does not give the buyer cash to complete the purchase. Instead,
it involves extending a credit against the purchase price of the
home while the buyer executes a promissory note and trust deed in
the seller's favor. These special circumstances must be acceptable
to the lender who makes the first mortgage on the property.
The necessary paperwork is prepared by the title or escrow company
after the terms are worked out between the buyer and seller.
It is critical to thoroughly evaluate the creditworthiness of the
buyer first. Fear of default makes many sellers reluctant to take
back a second. But seller financing can bring a higher price plus
complete the sale sooner in some situations.
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