When a property is available that offers seller financing, oftentimes potential buyers are confused about the terms. Seller financing is a simple option that allows the buyer to pay the current property owner for the property much in the same way they would pay a bank or hard moneylender. Simply put, the seller holds the mortgage on the property, and you as the buyer pay them as per the agreement that you have in place.
When a seller is financing a piece of property, it works similar in nature to a traditional bank loan. The property is deeded to the buyer, and the seller puts a lien on the property for the amount of the mortgage they hold. In many cases, this lien is larger than if you were to get traditional financing. A seller is not bound to the same restrictions banks are, and you may be able to put less money down on the property.
One of the best things about working directly with a seller to finance your purchase is the interest rates, which are typically lower than you could get on your own. This is particularly true for those buyers who have a lower credit score. Keep in mind, banks lend on risk, and they do not want to be property owners, so they mitigate their risk by charging higher interest rates on their loans.
With most bank loans or mortgages, the buyer often has to pay a premium for mortgage insurance. Private mortgage insurance (PMI) is a policy that protects the lender and does not offer any protection for the buyer. Most lenders require this policy if you are putting less than 20 percent down on your purchase.
There are numerous benefits for both the seller and the buyer when they decide on seller financing. Some of the benefits include:
There are other things that make seller financing more attractive, such as the type of property that you are purchasing. For example, traditional lenders often do not wish to offer loans on undeveloped parcels of land. This means that, in addition to getting the funds to develop the land, buyers often have to pay for the entire parcel up front. This is not always a good solution for most borrowers, since it cuts too much into their savings.
Any borrower who has the option to elect to have the seller finance their purchase can enjoy many of the benefits that are offered using this type of financing. In these cases, both buyers and sellers can benefit from the transaction, with no involvement from the bank. For most, this is a win-win solution to ownership.