3 Things You Should Understand About Seller Finance

3 Things You Should Understand About Seller Finance

Did you know that the ‘American Dream’ of home ownership began in England? Back in the olden days, the only persons who could own land were those who were given land by the Crown, they were called Landed Gentry or nobility. This meant very few persons owned; the mass population rented their home or farm their whole life.

According to a study by the Census Bureau, as of the last quarter of 2013, only 65.2% of persons own a home.[1] When the desire to own a home becomes substantial, the first thing you should do is speak with a mortgage lender about financing. Your lender should be someone you trust. Someone who can assist you in obtaining not only the loan, but with suggestions of what you would need to do in order to qualify for a loan should your current credit or financial situation be shy of qualification. Did you also know, most people assume they can’t qualify for a home loan and instead go the route of rent-to-own, a.k.a. lease purchase or owner finance?

Did you know that there is a difference between rent-to-own and owning? I bring this topic up due to I’m seeing more and more listings and signage for “Seller Finance”. In most situations, the seller is the owner of the property. Today, this may mean that the owner bought the home for cash, made some updates to the home and is now wanting to ‘sell’ the home to you for the value based on today’s housing market. There’s typically not much to qualify: current job, steady paycheck and non-refundable down payment. In exchange, you get a deed with your name on it, the seller is your ‘bank’ and your ‘mortgage’ is typically a balloon note (a loan that’s due to be paid in full, typically 5 years).

If you decide on seller/owner financing here’s some things you need to know:

  1. Unless your home is paid in full, you don’t own the home, the lender does. The difference between a bank holding the mortgage and seller finance is-

    1. A lender is governed by Fair Housing[2] laws, RESPA[3] and several other US guidelines, while an individual seller typically is not.

    2. Length of lending term- typically 5 yr balloon note vs 30 yr full mortgage term. A balloon note is a loan which must be paid off in the prescribed time or the note holder has the right to foreclose to obtain the property back for breach of contract. This means you’d be renting or homeless if you can’t pay off the original note via new mortgage or cash.

    3. How much will the home cost at the time the balloon is due? Markets fluxuate. You may end up paying more than the market (which you'd be hard pressed to find a loan for the amount due) or you may make out on the up side. There is no crystal ball.

    4. How much of your monthly payment is going toward principal amount of the loan, or is there a portion which the seller has set aside for down payment toward your new loan at time of balloon? ASK- What happens to the principal that’s paid to you during the balloon period?

    5. Interest rate- current standard rate typically based on the T-Bill or Libor index vs a rate that could be as much as 10% higher.

    6. Mortgage instrument (the loan paperwork). If you’re going the route of seller finance, have a real estate attorney read over your loan document and tell you exactly what you’re signing, that there’s no hidden clauses, early termination penalties, loopholes (such as you can’t sell the home during your balloon note period), etc. KNOW WHAT YOU'RE AGREEING TO.

  2. Representation- Today’s market generally has a Seller’s agent and a Buyer’s agent. In the case of by owner, the seller typically represent themselves, so the transaction is in their best interest. Do you the buyer have a representative in the transaction, Realtor or Attorney?

  3. If you’ve purchased a home before, you may know the local home purchase transactional procedures. Here’s a few:

    1. Get a home inspection from a licensed inspector of your choice. You need to know as much about your potential home as possible.

    2. Get a termite inspection- even if the house is concrete, the home could still have an issue as the interior framing and roof are made of wood.

    3. In Austin, you’ll most likely need to have the home measured for foundation stability. Most inspection companies offer this service, but if something if off, you’ll need a structural engineer.

It’s your right to have any licensed inspection performed on the home you’re thinking of purchasing.

Purchasing a home is a long-term, expensive proposition. Do your homework on the market- is it trending up or down? Get pre-qualified or pre-approved for loan. If you can’t qualify now, ask your lender what you’d need to do to qualify and an estimate of time it may take to correct an issues. If you have credit issues now, chances are 5 years from now you’ll still have the same issue(s), but you could be homeless because you still can’t qualify for a loan to purchase the home you’re in.  Contact me for more information regarding seller financing, representation as a home buyer or seller, or any real estate related questions.

[1] http://money.usnews.com/money/personal-finance/articles/2014/04/15/when-homeowners-are-better-off-than-renters

[2] http://portal.hud.gov/hudportal/HUD?src=/program_offices/fair_housing_equal_opp/FHLaws

[3] http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/res/respa_hm

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Phone: 512-380-1823
Dated: August 22nd 2015
Views: 276
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