Seller financing has long been used in real estate. It can provide a great deal of buyer incentives. With interest rates climbing with seemingly no end in sight, it's time to dust off seller financing tactics once again.
During the crazy rush of new buyers taking advantage of historically low 3% interest rates and down payments in 2018-2021, seller financing was not necessary since home buyers competing against each other were willing to pay over asking price.
That window closed this past summer (2022) and interest rates rose 4 times in six months. Fannie Mae projections are they will climb to over 10% by end of 2022. As such, its likely time to re-introduce these strategies to home sellers.
Different Types of Seller Financing
Seller financing in part can be utilized to attract home buyers facing climbing interest rates. Typically, seller financing is often thought of as in a land contract arrangement where the seller steps in the shoes of a bank.
Land Contract: Instead of using a conventional mortgage from a bank, credit union, or other financial institution, a seller financing agreement allows the buyer to pay the seller in installments. The buyer enters into a contract with the seller, a large downpayment is often required and length of term is agreed to. Much like a bank, an interest rate amortization schedule is provided covering the length of the term (typically 3-5 years). During which time the buyer can refinance into a conventional mortgage. At the end of the term, a balloon payment toward the remaining balance is often required.
However, there are other ways to use seller concessions.Â
Purchase Money Mortgage: Also known as "seller financing", "owner financing" and "holding mortgage". If you choose a purchase-money mortgage, which is a mortgage that is issued directly to a home buyer by a property seller, you will enter into a mortgage with the seller rather than a corporate lender.The mortgage application and financing will be handled by the seller.There is no minimum down payment with seller financing, people with bad credit can still buy a house, and there are fewer rules.Owner financing or purchase-money mortgages are other names for it.However, these benefits can also quickly become disadvantages.
Assumable Mortgage:Â A type of home financing called an "assumable mortgage" gives buyers the chance to buy a house by taking over the seller's current mortgage (especially if it has a lower interest rate) and taking over the mortgage. Wholesalers often used this strategy and it became more popular during the crash of 2006-08. However, given today's rising rates, this strategy could be making a come back.
Land Loan: A land loan is used to make the purchase of a piece of land for later use as a residential or commercial property easier and more affordable.
Seller Benefits
In tough times when sales are slow, seller financing might be a good choice.The following are some of the benefits for sellers:
- Possibility to save money on closing costs.
- Over time, you could save a lot of money on capital gains taxes.
- Quicker sale time and the ability to sell your house as-is without having to fix anything.
- Freedom from paying property taxes, homeowners insurance, and other maintenance costs.
- Option to sell the promissory note to an investor.
Buyer Benefits
If a buyer chooses to buy a home with owner financing, they may also enjoy a number of advantages, including:
- More opportunities for financing, especially for buyers with low incomes
- Lower closing costs.
- More flexible agreement terms.
- Possibility of no PMI premiums.
- Accessibility for those with poor credit
Another possibility to seriously consider can revive a sale in danger of falling apart due to another rate hike is through seller concession rate buydown. Far too many agents are aware of this powerful strategy that benefits both buyer and seller in big ways.Â
Your Two Cents
Which of these strategies have you utilized in the past? Let us know what you thought of this article and feel free to leave suggestions for new article topics too!Â
