Buying or selling your home when the credit market is tight is an uphill task. Seller financing is a useful tool in this case, as it allows you to sell your house fast and actualize returns on your transaction. For buyers, this option will enable them to own a home with a lower down payment and credit requirements compared to traditional home loans. In this seller or owner financing, the seller will assume the role of a mortgage lender and extend credit to a buyer for a home purchase.
Under the guidance of an experienced realtor in Taylorsville or any other location, there are several documents a seller and buyer will sign on the terms of the loan. The vital ones are a promissory note that spells the loan’s terms and a deed of trust that acts as the loan’s security. The following are the types of owner financing arrangements you can choose for your home’s purchase or sale.
Junior Mortgage
Most lenders nowadays are only willing to extend credit to homebuyers for 80% at most of a property’s value. A home seller can extend credit to a buyer to meet the difference after a conventional mortgage. This credit is known as a junior mortgage and covers the balance of a property’s purchase price minus the down payment. The seller gets the cash from the first mortgage lender.
A junior mortgage, however, gives a seller a lower priority compared to the first lender. In case the property is foreclosed or repossessed, the junior mortgage will only be repaid after the first one.
All-Inclusive Mortgage
This is also called AITD (all-inclusive trust deed). Here, the seller’s existing mortgage will remain in place. The property owner will agree to a price that reflects the mortgage’s balance and a profit. The buyer will then make a specific monthly payment to the seller, who consequently services his/her mortgage and recoups profits. If the buyer defaults on repayment, it is the seller’s responsibility to service his/her mortgage.
Lease Option
Here, a property buyer will first lease a home for a set period, much like a conventional rental. The seller will, however, agree to sell it to the buyer at a set price in the future with a down payment. The buyer makes monthly rent payments and earns an equitable interest in the property. When the lease ends, he/she will pay the remaining balance and own the house. In a lease option, sellers should ask for a non-refundable down payment and buyers should record the lease to safeguard the transaction.
Assumable Mortgage
This allows a buyer to take a seller’s place and repay the latter’s existing mortgage. Most conventional adjustable rate mortgages, VA, and FHA mortgages are assumable. The buyer, however, pays the difference if the mortgage’s balance is lower than the property’s purchase price as a down payment or through another mortgage.
Most people will steer clear of the above seller financing arrangements owing to the perceived risks for buyers and sellers and the general misinformation. When properly handled, however, the risks are minimal and the profits for buyers and sellers are substantial. This is only guaranteed when your seller financing arrangement is drafted under a seasoned realtor’s guidance.
