Traditionally, home buyers use mortgages from banks to purchase homes. However, you can offer buyers who may not qualify or want traditional loans an alternative called seller financing. This is where the buyer essentially makes payments directly to you for your home. Here's more information about how this option works and why it may be a good one for you.
Seller Financing Basics
As noted previously, with seller financing, you act as the lender. You don't give the buyer money directly. Instead, he or she makes payments on the home to you for a set period of time before making a balloon payment at the end. For example, the price may be amortized for 30 years to get a basic monthly payment. However, the buyer only makes payments for 5 years before giving you the balance by an agreed upon date.
You'll enjoy several benefits if you choose to employ this alternative financing:
- You can charge whatever interest you want, though some experts recommend 7 to 8 percent. You'll make more than most other types of investment options.
- You can accept a lower down payment than banks require, which may make your home more affordable for a larger number of buyers, increasing the chance the property will sell.
- Closing is typically much faster since you don't have to wait for bank financing.
- Seller financing may make your home stand out in the market.
- You can sell the contract to another investor if you need cash fast or don't want to continue dealing with it.
If you're not in a hurry to get paid, seller financing can provide you with a steady source of income, while minimizing your expenses since the buyer would be responsible for insurance and taxes.
Things to Beware Of
First and foremost, seller financing works best if you own your home free and clear. If you have a mortgage, you would need to get permission from the bank to offer seller financing. Additionally, it may make it difficult for you to get approved for loan for a different home when you still have one that's active.
Second, while you don't have to conduct credit checks, it's a good idea to do it. Unless you know the person really well, you need to ensure the individual won't default on the agreement. Although you'll get the home back if that occurs, you may have to pay for repairs if the buyer didn't maintain the property before you put it back on the market.
There are many other things to consider about offering seller financing. Discuss the issue with a real estate agent, like OCALA LUXURY, who can provide further insight that can help you determine if this is a good option for you.