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For Sale by Owner Articles • Owners.com - Seller Financing

Financing a Home

By Robert J. Bruss
 
"Whatever happened to home-seller financing?" That was the question an investor friend from Chicago asked me.
He and his wife have bought rental houses for years and have never filled out mortgage loan application forms.
Their secret? They always buy with easy financing provided by the sellers. I estimate they own at least 20 houses, probably more.
He complained that buying with seller-financed mortgages has become difficult. "There are too many cash buyers out there," he griped.
But then he told me about a free-and-clear house he and his wife bought in May. The sellers jumped at his purchase offer with 10 percent down payment and a 90 percent mortgage at 8 percent interest for 25 years.
My friend said his biggest obstacle was the listing realty agent who said, "You can't do that."
But when he explained his offer to the elderly home sellers (probably at the kitchen table where all great family decisions are made), they jumped at the chance to increase their retirement income with a mortgage secured by their old home.
What are the advantages of home seller financing?
If you have less-than-perfect credit but want to buy a home, or just hate to fill out mortgage applications, seller financing is for you.
No loan applications. No mortgage lender rules and ratios. No FICO scores (although a seller may ask for a credit report and verify employment or income). No loan committee intimidation. No appraisal. No mortgage lender "garbage fees." No loan fees. No unnecessary lender paperwork.
It's a well-kept secret, but every day thousands of homes are sold with seller "carry back" financing.
Home sellers benefit from quick, easy sales for top dollar with a profitable investment secured by their former residence. Buyers benefit from "easy financing" without mortgage lender hassles, but the major problem for any buyer is finding a home seller who will finance the sale.
How to find home seller finance candidates
Few homes are ever listed for sale with seller financing. Realty agents presume buyers will make all-cash purchase offers.
The result is not many sellers know they can carry back a first or second mortgage to provide an excellent, safe investment yield while making a quick, easy sale for top dollar.
  1. Free-and-clear homes
    The best candidates for seller financing are homes that are free-and-clear with no mortgage, or a small one. Statistically, almost 50 percent of U.S. homes have no mortgages.
    Other alternatives are homes for sale with assumable first mortgages, such as older VA, FHA and assumable rate mortgages. Then the seller can carry back a second mortgage to fill the finance gap.
  2. Vacant homes sold by retirees or wealthy sellers
    Elderly home sellers often need additional retirement income. They're hoping for a cash sale so they can invest the proceeds at the bank, perhaps earning 5 to 6 percent interest.
    If you offer these sellers a mortgage at 7 or 8 percent interest, you look like a hero because they didn't know they could earn such high yields with safety.
  3. Vacant homes that have been listed for sale several months
    Additional signs of a motivated seller who might carry back a mortgage include vacant houses that have been listed at least 60 days and/or that are in less-than-perfect condition.
    Fixer-upper homes appeal to only a few buyers and can be hard to finance with new mortgages. Your offer for seller financing might be especially welcome.

How to convince home sellers to finance your purchase
Having bought many investment rental houses with seller financing, my experience has been that most sellers (and their realty agents) never considered seller financing.
They might also fear foreclosure if the buyers' payments are not received on time.
Frankly, foreclosure can in some cases benefit a seller who will then either get paid in full at the foreclosure sale or get the house back to sell again for a second profit.
To reassure reluctant home sellers, use these techniques:

  1. Offer to prepay six to 12 months of mortgage payments (instead of a big down payment) at the closing.
  2. Give the sellers a year's post-dated payment checks so all they have to do is deposit one check on the first of each month.
  3. Accompany your realty agent to present your seller finance offer so the sellers can meet you.

Home seller financing is the best, cheapest and easiest way
Home seller financing is the best, cheapest and easiest way to finance your home purchase because there are no mortgage-approval uncertainties.
However, most sellers and their realty agents are not familiar with seller financing, so buyers must convince sellers of the advantages.
The best seller-finance candidates are free-and-clear vacant homes listed for sale several months by elderly or wealthy sellers who want a fast sale for top dollar.

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