Is A Seller-Financed Mortgage Right For You?

by Allan Wulff, MBA. Ph.D. 04/12/2020

Photo by Charles Thompson via Pixabay

A vast majority of homebuying  transactions rely on the buyer qualifying for a mortgage through a bank. After all, most people don't have enough cash lying around to buy a home outright. Nowadays, you have more options with different types of lenders and alternative financing companies where you can seek pre-approval online. But sometimes even these options don't work out, as pre-approval doesn't mean you're actually going to get the underwriter at the lender to approve you.

This could make you consider other alternative options like seller-financed mortgages.

What is a Seller-Financed Mortgage and How Does It Work?

As the name implies, you are financing your purchase with the person or company selling the home instead of taking out a mortgage with a lender. It's a private transaction where you, the buyer, make an arrangement with the seller to buy the property.

The seller draws up a promissory note that details the terms of the mortgage: interest rate, payment schedule, and the consequences if you default on the mortgage. In most cases, the seller then finances the sale for a short term, usually five years, with a balloon payment at the end of the period. However, the promissory note can be sold at any time to another financing company: sellers don't necessarily need to wait for the buyer to refinance with a more traditional lender.

Why Would I Consider a Seller-Financed Mortgage?

There are situations that make it difficult to work with a traditional lender, such as:

  • Self-employment / entrepreneurship
  • Foreign employment
  • Frequent job changes, or you haven't held the same job long enough
  • Poor or no credit
  • Tax-related issues
  • Debt-income ratio is too high

Sometimes, these situations can be incredibly frustrating when you know you'd be able to afford the mortgage payment or it's even far less than market rent where you want to buy! Alternative lenders may have options but sometimes even they don't want to lend to the self-employed or borrowers with high student loan or credit card debt.

This makes seller financing a more viable option when you can demonstrate your ability to make payments but are having trouble with the traditional channels.

What are the Key Pros and Cons of Seller-Financed Mortgages?

The down payment, interest rate, and other terms are more flexible although they may not necessarily be better than what you would get with a bank. There are also no points, PMI, or origination fees which can save money upfront and over the life of the loan.

Closing is also much faster, easier, and cheaper because there's no loan officer or underwriter involved. 

However, the seller may not always confirm they're able to finance the sale. If the seller has a mortgage, most of them have a due on sale clause that forbids them from selling the home without paying off their mortgage balance first. If the seller still does this without paying off the mortgage first, your new home could get foreclosed on.

The homebuying process can be a difficult undertaking, but we're here to help you find the best options so you can buy your dream home as quickly as possible. Reach out today to learn more!

About the Author
Author

Allan Wulff, MBA. Ph.D.

Hello and thank you for visiting! Selling or buying real estate is very serious business! I provide extraordinary results! Prior to real estate I was President/CEO of a number of area technology companies, Vice-Chairman of the INOVA Hospital Association and have been a long time member of the Association for Corporate Growth. With a broker’s training and experience, you get more than just a realtor agent. My negotiating skills and astute problem solving capabilities, honed by executive experience, have proved extremely effective for my clients in achieving their dreams and real estate goals in this current complex and fast paced market. As a long time Northern Virginia resident my experience will benefit you whether you are buying a home or selling a home or are a returning client checking out the many homeowner resources my associates and I offer. Buying a home? I look forward to helping you select the home of your dreams by taking time to listen to your needs and desires. Selling a home? My real estate expertise and many effective marketing programs will give you the exposure and edge you need to sell your home quickly for top dollar. Testimonials. I appreciate the opportunity to continue to serve you and hope you take advantage of the valuable resources I provide. Come back to visit often! I consider this community an excellent place to reside and would love to share with you my enthusiasm for the many neighborhoods in the area. I pride myself on providing unparalleled service and look forward to developing a long-term relationship with you. Please feel free to contact me if you would like to discuss how I can best assist you with your real estate goals. Sincerely, Allan Wulff