Seller Financing - What is it?

Also known as seller carry-back. It is a financing option buyers can seek instead of going through the traditional mortgage lenders. But it requires a willing seller who holds title to the property free and clear or who has a very small mortgage balance. In a nutshell, here's how it works:

The seller accepts a downpayment from the buyer, let's say 10% down, and finances the remaining 90% of the mortgage. Buyer makes monthly payments to the seller. If the buyer defaults, the seller can foreclose on the property or regain title to sell the property.

This, like all other real estate transactions, should be looked over by a real estate attorney to make sure all bases are covered and ensure there are no fraudulent and illegal activities involved in the financing. In this way, everyone is protected.

The advantages for sellers:
1. It is an investment where your cash is earning a higher interest rate than what your bank offers for your savings account.
2. You get a monthly income through your retirement age. That's extra money in your pocket.
3. Because seller financing can be used as an incentive to buyers, you can sell your home quicker even in a slow market.
4. You have the security of a mortgage on a property you can foreclose on in case of buyers default.

The advantages for buyers:
1. If you are a "cash-challenged" buyer and don't have enough downpayment, this can be a good financing option.
2. If your credit score is not quite up to par, seller financing may be more lenient with charging interest rates than a the sub-prime lender.

Not every home can be purchased through this option. A willing seller is needed. A real estate agent and/or real estate attorney to guide you through the legalities of the transaction is strongly recommended.

Since I entered the industry two years ago, I have yet to experience this type of financing transaction. The market then was not quite friendly with this type of financing because sellers did not need to offer this type of incentive to sell their homes. But the market is turning around favoring buyers so this type of financing may make a come-back and become more popular. But no one has a crystal ball to foretell the future....so we'll just wait and see.