If you can’t get traditional financing from a bank to buy a home, you might have the option of seller financing. Rather than obtaining the funds from your lender, the seller lends you the money. In this case, the only money that exchanges hands is the down payment you provide. The seller then sets you up on a predetermined payment plan to pay the loan back.
Many seller-financed loans have unique terms, though. They are usually short-term loans with a balloon feature. In other words, you make your monthly payments for a predetermined type at a fixed interest rate. At the end of the term, though, which could be as little as 2 years or as long as 10 years, you owe the entire outstanding balance.
The idea behind the program is to give you a chance to straighten out your finances and/or credit to be able to refinance the seller provided mortgage.
Is this method a good idea, though?
The Pros of Seller Financing
As a buyer, you stand to gain many benefits from seller financing, including:
- You may be able to own a home faster than you would with traditional financing. Sellers decide what qualifying factors you need, which are often more flexible than the bank’s guidelines. In other words, you may have poor credit or a high debt ratio and still qualify. You can then own a home while you fix your credit and/or financial situation.
- You may be able to make a smaller down payment. Sellers decide how much of a down payment you must provide. It’s usually less than the traditional 20% down payment required by lenders. Each seller has his or her own guidelines, though.
- You may pay fewer closing costs. Because you aren’t using a traditional lender, your closing costs may be thousands of dollars cheaper. You’ll still have to pay for title fees, appraisal, and inspections, but the lender fees will be limited.
The Cons of Seller Financing
There are a few downsides you should know about buying a home with seller financing. They include:
- You might buy a home before you are ready. There’s a reason lenders set credit score and debt ratio requirements. They don’t want you getting in over your head. If a seller is willing to work around those requirements and provide financing, you may buy a home before you are financially prepared to do so.
- You may pay more for the home than necessary. Some buyers tend to trust sellers and their asking price and avoid the appraisal. This can cause you to pay more for the house than the fair market value, which can put you in a bind when you need to refinance the loan to abide by the balloon feature on the mortgage.
- You’ll likely have a balloon payment. You have to have all of your ducks in a row to be prepared for the balloon payment. If you find out you can’t refinance and it’s near the end of the seller-financed term, you could default on the loan and lose the home. Any money you paid to the seller up to this point is now lost in a sinking investment.
Use an Attorney
You need an attorney to help you buy a home with seller financing. Even though you’ll pay another fee, it’s important to have this representation. An experienced attorney will recognize when you are overpaying for the home, paying too high of an interest rate, or getting in over your head.
You can use this neutral third-party advice to decide how to move forward. Sometimes seller financing is beneficial, especially if you are on the cusp of getting approved for bank financing. It allows you to stop renting and own a home quicker. But, if it’s going to put you in over your head or make it hard to qualify for refinancing at the end of the term, it could end in trouble.
Do your due diligence and decide if seller financing is right for you. Never buy a home without an appraisal, so that you know the true market value of the home. also, have professional representation so that you know that your best interests are covered.