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Seller financing, owner financing, and purchase-money mortgage all refer to the same financial arrangement, one where a seller finances the home rather than a lender and a traditional mortgage to purchase a home. When conventional banks and lenders begin to tighten their qualifications, a seller can open the door to more offers by offering credit to a buyer when another lender would say no. Find out more about the process works, and whether it's worth the risk.

How Seller Financing Works

Sellers typically offer seller financing when they have a solid equity stake in the home. They may own it outright or be extremely close to paying it off completely. Sellers don't give buyers the money they need to buy the home and then work out a payment schedule.

Instead, sellers request a down payment and then extend the leftover costs in credit to the buyer. The buyer signs a promissory note agreeing to pay down the credit according to the terms laid out by the seller. Terms include the number of payments, the length of the loan, and the rate of interest.

Why Do Sellers Offer Owner Financing?

The biggest advantage is that owners attract more buyers:

• Lender troubles: Some buyers are perfectly trustworthy people. However, if lenders are nervous about giving out too much money, they may reject people who have every means to pay their mortgage.
• Quality of offers: Sellers located in a popular area may want to take full advantage of the moment. Seller financing is a way to spark an intense bidding war. The option opens up properties to people who wouldn't have been in the running before.
• Money perks: Sellers charge interest for their credit and can make a tidy profit on their seller financing.
• Flexibility: Sellers offer far fewer conditions on their credit than a lender will. They may not even require the buyer to pay for an appraisal. This can all but eliminate all or most closing costs for a home buyer.

Sellers who offer seller financing should state this fact up front, and even provide a brief explanation to the buyer. Even in tight money markets, seller financing is still rare, so this helps buyers know what their options are.

Why Don't Sellers Offer Owner Financing?

There are a number of drawbacks of seller financing:

• Easy money: When banks are generous with their loans and interest rates, seller financing is no longer as attractive to either the seller or the buyer.
• Taxes: Seller financing can easily become a tax nightmare, especially if the seller is audited at any point. They typically need to hire a financial expert for help, which can cut into profits.
• Defaults: A buyer that defaults can mean a big loss for the seller. Sellers could lose a huge portion of their investment, especially if the home has plunged in value from the time of sale.

Additional Options

Sellers don't need to make a 30-year commitment to the loan if they don't want to. If they grow tired of being an amateur lender, they're allowed to sell the promissory note to a traditional lending institution or even an interested investor. Sellers can choose to this on the day of closing, so they never have to worry about whether they'll get paid. The catch is they'll need to sell it for an amount that is less than the stated offer of the promissory note.

Sellers can also hire a loan servicing company to aid in the process of lending. This company will take care of issuing invoices, updating buyers, and collecting the money. This step can be a lifesaver for sellers who can't devote much time to the financing process. If buyers aren't informed of relevant changes to their loan, they could potentially sue the seller for any lost funds.

Working Out the Terms

Newmarket home buyers are subject to a seller's terms once they sign the paperwork, but it's up to the seller to lay out what those terms should be. This is a good time to talk to a qualified real estate agent or a financial expert who knows what's standard and what isn't. For example, some sellers will include a mandatory balloon payment for the buyers. This payment is large sum paid to the seller at a later date (usually twice the size of a regular payment). Sellers can also charge a higher interest rate than traditional lenders.

Many sellers don't want to go through the work of seller financing, especially if they've never had any lending experience. However, those who do successfully take on the challenge may find themselves with better quality offers and a strong source of secondary income.