Category: Seller Financing
Types of Seller Financing
Seller financing is carried most commonly in one of two ways.
Seller Takes Back Mortgage
The first is for the seller to take back a mortgage on the house. The buyer signs both a promissory note (promising to repay the loan) and either a mortgage or a deed of trust (allowing the seller to foreclose if the buyer fails to pay). In return, the seller signs a deed transferring title to the buyer. Because the buyer holds the title, the buyer can sell the house or refinance, but the buyer must keep making the agreed-upon payments to the seller. This technique is used on properties that the buyer wants to live in or sell and offers the buyer a lot of flexibility and options. It most commonly occurs when the seller owns the property outright.
Seller Keeps Title to Property
The second and less popular way is for the seller to keep title to the property for as long as it takes you to pay off the loan. The contract the buyer and the seller sign is known by various names, including contract for deed, contract of sale, land sale contract, or installment sales contract.
Financing: Seller Financing
Seller financing is financing extended by a seller, instead of a bank, to a buyer. The buyer pays interest to the seller and is approved by the seller instead of the bank. The buyer and seller agree to the interest rate and the total term. They can choose to create their own documents or use an attorney to create the mortgage document and close the deal. And last but not least, the seller usually keeps a lien, or legal right, to the property in the event that the buyer discontinues payments.
Seller financing can be a great way for a credit-challenged buyer to secure a property without having to deal with a bank. As a result, seller financing is often more common during down times in the real estate cycle. On the seller’s side, if one of your long term goals as an investor is to have a portfolio of performing assets, you can have a monthly cashflow secured by real estate purchased via seller financing. Seller financing can be a great exit strategy as well.
Contracts Used in Seller Financing
In seller financing, the seller and the buyer are bound by a contract, which allows the seller to foreclose in the event of non-payment. Seller financing usually use three contracts to solidify the deal: 1) purchase and sale agreement to buy the property, 2) security instrument to secure the debt to the property, which can be a mortgage, trust deed or deed of trust, and 3) a loan document called a promissory note that secures the right to receive payments.
