With mortgage money harder to get, sellers provide financing
CHICAGO (MarketWatch) — It’s much harder to get a mortgage today than it was a couple of years ago. That’s why some home sellers are stepping in and financing deals on their own.
The concept of owner financing isn’t new, though it wasn’t as popular when mortgage money was easier and cheaper to come by through traditional lenders. But in today’s tough real estate markets, being able to finance the sale of your home can give a seller an edge.
“There are a lot of good buyers out there that can’t get loans,” said Dawn Rickabaugh, of Rickabaugh Realty, in Pasadena, Calif. “When you eliminate the hurdle of qualifying for a bank loan, you’ll double the amount of buyers interested,” she said. Rickabaugh also oversees the Web site NoteQueen.com, which focuses on owner financing.
Loans that are most difficult to get — including jumbo mortgages and financing for commercial properties — are ripe for seller carry-back scenarios, Rickabaugh said. But it can be done for any property type, and sellers can finance all or part of the loan, she said.
Seller financing can help buyers who may be having trouble getting a loan because they are self-employed or work on commission, for instance. It can also help someone barred from a traditional mortgage due to scarred credit — if it can be explained, said Dorcas Helfant-Browning, principal broker and CEO of Coldwell Banker Professional, Realtors in Virginia Beach, Va.
Or consider the couple who co-signs a car loan for their child, but he or she failed to make payments on time, Helfant-Browning said. The parents then face a lower credit score, making it harder for them to get a mortgage.
This is a scenario she has seen before.
“The blip in the credit report was explainable,” she said, and they’d likely still be a good credit risk for a seller who was willing to finance a purchase.
From the seller’s side
Aside from the marketing incentive that owner financing provides, there are additional benefits to this strategy from a seller’s perspective.
In return for financing the mortgage, they receive a steady income stream from the mortgage payments. And at a time when other investments are more volatile, the interest on these mortgages could provide sellers with a welcome return, perhaps 7% or more.
“Many people carry paper intentionally. They can defer capital gains, and they create retirement income,” Rickabaugh said. Those who own a home free and clear, or have a lot of equity built up, may find this strategy particularly attractive.
But this type of deal isn’t for everyone.
“It wouldn’t be for someone who needs all of their money now to purchase their next home,” said Russell Bean, a real-estate appraiser in Georgia and Alabama and a real-estate consultant who has experience with seller financing. That said, the seller doesn’t have to hold the mortgage forever; the paper can be sold on a secondary market, he added. Even in this difficult credit market, good quality notes can be sold on a secondary market, Rickabaugh said.
But if the buyer defaults on the loan while the seller is holding the paper, the seller may need to reclaim the property through foreclosure.
To protect themselves, sellers should ask for a sizable down payment from a buyer when they do this type of deal — especially if the buyer has a weak credit score, said Bill Broadbent, co-author of the book “Owner Will Carry.” Accepting too small a down payment can be a huge mistake because the buyer has less of a stake in keeping the home, he said. Broadbent recommends accepting no less than a 10% down payment.
Sellers need to work with a real-estate attorney to craft the terms of the deal, with details including what constitutes a late payment and default, or what happens if the buyer neglects to adequately insure the property, said Helfant-Browning.
Make sure the person you’re working with has knowledge of this kind of transaction, Rickabaugh said. It’s also wise to hire a loan servicer to collect payments and keep records, she added. Rickabaugh recommends SellerLoans.com. You can use peer-to-peer lenders such as VirginMoney.com, as well.
From the buyer’s side
Obviously, the biggest advantage to the buyer is getting a loan he otherwise couldn’t have.
Buyers who go this route have to make sure they understand the terms of the contract; getting an attorney’s eyes on the document will help. For example, it’s not unusual for these loans to involve a balloon payment, and that’s important to know going in, Broadbent said.
It’s also important to learn if there are any liens on the property prior to finalizing the sale, said David S. Lorti, of Re/Max Elite in Tempe, Ariz.
And remember, just because seller financing is available doesn’t mean a buyer should take it without exploring all other options. Buyers also should see what financing they could get through more traditional means, Lorti said.
“It behooves the buyer to be thinking ‘What can I get on the open market as well,'” he said.