Seller Financing: How It Works, Pros And Cons And If It’s A Good Idea

The practice of seller financing goes by many names, including purchase-money mortgages and owner financing. But in its simplest terms, it describes a form of real estate lending transaction in which a property owner also serves as a mortgage lender. This unique situation in the home selling process eliminates the need for a financial institution to handle financing agreements and negotiations.

Seller financing is championed by some property owners and real estate pros as a way to help home buyers qualify for additional mortgage opportunities, reduce the amount of red tape associated with home sales and improve profit margins on lending. But while seller financing effectively sees a seller provide a buyer with direct financing, it comes with pros and cons attached, as does any nontraditional mortgage option.

Noting this, it’s important to do your research and consult with a qualified professional before entering into a seller financing agreement.

What Is Seller Financing In Real Estate?

Seller financing is a type of real estate agreement that allows the buyer to pay the seller in installments rather than using a traditional mortgage from a bank, credit union or other financial institution. A seller financing agreement functions along similar lines as a mortgage loan, except that it allows the home seller to own and oversee the debt instead of a traditional lender. Seller financing is also referred to as owner financing or purchase-money mortgages.

How Does Seller Financing Work?

If you opt for a purchase-money mortgage (a mortgage that is issued to a home buyer directly by a property seller), then the seller will provide financing and handle the mortgage process, during which you will enter into a mortgage with the seller instead of a corporate lender. Seller financing’s advantages include no minimum down payment, homeownership access for those with poor credit and fewer regulations.

Common Types Of Seller Financing Agreements

Certain home buyers may find these options (which may provide more opportunities to finance a home purchase and may even come without a credit check attached) attractive, especially low-income or first-time home buyers. Be advised, though: Some seller financing offers may function more like rental agreements than traditional mortgages and offer unfavorable loan terms that offset any initial benefits to be had.

As with any form of mortgage agreement and legally binding real estate contract, it’s important to do your research, and consult with a qualified professional upfront.

Let’s look at the most common types of seller financing arrangements:

• Land contracts: A land contract is an agreement to purchase a piece of real estate that involves buyers borrowing money from the real estate owner until the purchase price is paid in full, rather than from a bank, credit union or financial institution. Land contracts typically work in a unique fashion where a balloon payment, or lump sum, comes at the end of the repayment period after the repayment plan is negotiated between the two parties.
• Assumable mortgage: An assumable mortgage is a type of home financing in which buyers are given the opportunity to purchase a home by assuming responsibility for and taking over the seller’s current mortgage (especially if it’s charged at a lower interest rate).
• Lease purchase: Also known as a rent-to-own contract, a lease purchase agreement speaks to a form of agreement under which renters pay sellers an option fee at an agreed-upon purchase price that gives the renter the exclusive lease option to purchase the property at a later date.
• Land loans: A land loan is used to facilitate and finance the purchase of a plot of land for later use for residential or business purposes.
• Holding mortgage: Under a holding mortgage agreement, a homeowner agrees to serve as a lender for the home buyer, and provides a loan for the purchase, which the buyer repays by making monthly payments to the seller. The seller continues to hold the property’s title until full loan repayment has been made by the buyer.

Seller Financing Advantages For Sellers

Seller financing may prove a good option for those wishing to lend money. Select upsides associated with providing it include:

• Ability to save on closing costs
• Can produce significant capital gains tax savings over time
• Faster time to reach a sale, and ability to sell your property as-is without the need for repairs
• Released from property tax, homeowners insurance and various maintenance expenses
• Option to sell the promissory note to an investor