In today’s tenuous banking environment, many home buyers are being turned away by lenders for reasons other than their credit. Lenders are looking much more strictly at the properties for sale, and whether or not those homes meet new appraisal standards.
Further, lenders are keeping more loans on their own books, which makes them reluctant to make non-conforming loans. These include non-occupying home buyers (investors, second-home owners,), those requiring jumbo loans (above $417,000), and those buying a unique home for which comparables are scarce.
Financing issues mean your pool of home buyers is much smaller. One way you can attract more buyers is by telling your REALTOR that you are willing to offer owner financing.
Owner or seller financing simply means that you allow your buyer to purchase your property over a fixed period of time, and that you receive the principal and interest payments directly from the buyer. In other words, you become the buyer’s banker.
The solution isn’t for everyone, but if you don’t need the equity in your home as a lump sum at closing, owner financing allows you to earn a tidy monthly income, by collecting interest as well as principal payments toward from the sale of your home.
All it takes is a willing seller and buyer and a good real estate attorney to structure the terms and write the contract. You can service the loan yourself, or use a mortgage servicer that specializes in seller financing such as Noteworld.com
. A mortgage servicer handles all the details, from providing payment coupon books to the buyer to collecting the payments, assessing late fees, reporting the interest paid by the buyer to the IRS, all the way to buying your note when you want to sell.
The advantages to both buyers and sellers are flexible terms and lower closing costs. Sellers can also defer capital gains, if it applies, as well as a lump sum that could put them in a higher tax bracket the year of closing.
To determine if owner financing is right for you, consider the following:
Your current market. If your home has sat on the market without selling and you see prices declining, it’s time to consider seller financing. You may sell your home for less than you wish, but you’ll also collect as much or more in interest payments from the buyer. In a declining market, both you and the buyer are taking a risk. As the market improves, you can always sell the note yourself, or allow the buyer to refinance through a lender.
Your responsibilities as the banker/mortgage servicer. When you do any job yourself, you’re standing in for a professional.
As the banker, you negotiate both the terms and the price of the sale, including how much money the buyer will put down (3%, 20%?), the interest rate (usually a point or more above conforming rates,) and the payment terms – how much will go toward principal and how much toward interest over the years.
A mortgage servicer does not create the loan documents, but services them as a third-party. If you service the loan, you must perform all the duties on behalf of the primary note holder, including collecting payments, reporting interest paid by the buyer to the IRS, and foreclosing on the property, should the buyer stop payments.
Your buyer. Some buyers have had a reversal of fortune and are good financial risks, even if their credit is less than perfect, while others have a checkered history of defaults. Based on the buyer’s credit scores, renter or owner history, and work history, you can use information from the buyer that allows you to assess risk, just like a banker would. But only you know your own tolerance for risk. You’ll have to weigh the buyer’s credit worthiness and translate your risk tolerance into numbers. To be comfortable selling to this buyer, how much will you ask in a down payment? How much in interest? And what are the terms for repayment?
Seller financing isn't risk free, but with the help of professionals such as your REALTOR®, you and your buyer should be able to put together a mutually satisfying transaction.
Blanche Evans is CEO of Evans Emedia, Inc. and publisher of The Evans Ezine. As an award-winning journalist, Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and twice recognized as one of the industry's most "Notables."