According to the Home Buyer and Seller Generational Trends report in 2017, about 88 percent of home buyers finance their home purchase, with younger home buyers financing more often than senior home buyers. Often, this financing comes from a bank or federally regulated lender.
Unfortunately, not all home buyers are able to secure financing through traditional means. Buyers who are unable to qualify for standard financing will sometimes seek alternative ways to pay for a home. Sometimes, seller financing is one of the options available to home buyers. If you're thinking about purchasing a Dolores home and you're unable to secure financing through traditional means, here's what you need to know.
How Seller Financing Works
Most mortgages come from lenders like banks, but seller financing comes from the seller. To secure financing, the home buyer applies for the mortgage with the seller, and the seller decides whether to approve or deny the financing. Often, sellers hire a lawyer to ensure the paperwork is done properly and fairly for the seller. Buyers who want to protect themselves should also seek advice from a professional who can help them evaluate whether the documents they are signing are fair.
How Seller Financing Differs from Traditional Financing
Traditional financing is secured through a process that is heavily regulated by the federal government. Lenders are held to very strict requirements that prevent them from loaning to home buyers who do not meet specific criteria. When deciding who can be approved for a mortgage, lenders take into account factors like employment history, tax information, credit history, debt-to-income ratio and monthly income. Lenders are not able to bypass these requirements because of the law.
Sellers are not held to these same requirements. Therefore, sellers are able to lend to people who would not normally be able to borrow through traditional methods. Like standard mortgages, payments are amortized over 30 years. After 5 years of payments, the buyer is asked to make a final payment that pays the amount due for the rest of the house. This type of payment is known as a "balloon payment." To afford the balloon payment, most home buyers get a traditional mortgage from a lender.
Most home buyers enter into seller financing agreements assuming that their credit will improve in 5 years, and they will be able to secure traditional financing. If the home buyer is not able to make the balloon payment at the end of five years, they may lose the house.
Pros and Cons
Seller financing is not often the preferred financing method for home buyers. However, buyers who want to purchase a home and who are not able to get traditional financing often consider seller financing a better option than the alternative. There are many pros and cons to consider when trying to decide whether seller financing is right for you.
Pros of Seller Financing
Sometimes, buyers seek seller financing because the mortgage they are approved for is so small that they would not be able to buy a home that is in good condition or the right size for their needs. Sometimes, they are simply shut out of the home buying process. Either way, the most obvious benefit of seller financing is that buyers who would otherwise not be able to get financing are able to buy a home. Below are some additional benefits.
- Expedited approval process. Often, the seller financing closing process takes less time, which means the home buyer may be able to move into a home faster than they would otherwise.
- May result in better interest rates. The seller has control over interest rates and may choose to offer a lower interest rate than traditional interest rates.
- Fewer closing costs. Although there are closing costs, there may be fewer closing costs than are associated with traditional financing.
- May result in a lower down payment. Because the seller calls the shots in the seller financing situation, they may decide the buyer does not need to make a 20% down payment.
Cons of Seller Financing
There are many disadvantages of seller financing, including:
- Balloon payment. The balloon payment due at the end of five years can lead to a lot of stress as the home buyer tries to improve their credit enough to secure a standard mortgage.
- No guarantee of low down payment or interest rates. The power to charge a lower interest rate and down payment is in the hands of the seller, who may decide instead to require higher interest rates or a larger down payment.
Buying a Home? Work with a Real Estate Professional
Buying a home can be stressful, whether you're getting seller financing or traditional financing. Working with a real estate professional can make the experience easier. If you're a home buyer with poor credit, working with a real estate professional is even more important, because your real estate agent can help you negotiate a home purchase you can afford. To get started with your home purchase, contact a reputable real estate agent in your area today.