Real Estate Seller Financing:
Financing the Sale of Your Home

Sellers sometimes agree to finance all or part of a home's purchase price.  When this occurs, a seller in essence assumes the role of a lender.  Just how does this lending arrangement work?  And, as a seller, when would you consider carrying the financing, and what should you keep in mind when you do?

Basics of Seller Financing
With seller financing, the buyer receives a credit toward the purchase price of the property.  That credit may cover a portion of the price or the entire purchase if the seller owns the home free and clear.  Either way, the buyer makes a promise to pay, evidenced by a promissory note, and the property serves as collateral for the loan.

How the loan is to be repaid and other loan terms are usually negotiated between the buyer and seller.   So there can be numerous variations on the way these loans are structured.   Because there are no preset provisions as you would typically find in a mortgage from a traditional lender, a seller-financed loan can be as flexible as the parties involved.  It is up them to determine and agree on terms like interest rate, payment amount, late charge stipulations (if any), due dates, length of loan, and so forth.

Considering "Taking Back" a Mortgage
When and why you might consider offering financing is affected by factors like market conditions and personal financial situation.  If the housing market is slow or you are anxious to sell, then seller financing could attract buyers and be an incentive for purchase.  It could also be a viable option if, for tax purposes, you prefer to receive payments over time instead of a lump sum.  Of course you must be in a financial position to carry the financing.  If you need all of your equity at the time of the sale, then seller financing would not likely make your list for consideration.

Protecting Your Interests
If you are thinking about offering seller financing, here are a few pointers:

Seek legal and financial advice.  The interest you earn on the loan is taxable income.   As a result, this can affect your income tax situation.  You should clearly understand the implications before you offer financing.  If the tax implications are acceptable, have an attorney prepare the loan documents.

Analyze the buyer's financial condition.  It is crucial that you thoroughly evaluate the creditworthiness of the buyer.  The reason is obvious:  you need to know if the buyer is able and likely to repay the loan.  Ask for and examine documents that any other lender would look at such as their credit report, copies of financial statements or other financial documents.  Be sure to verify employment and any other sources of income the buyer will rely on to make their loan payments.

Give yourself an escape hatch.   When the purchase contract is written, all of the terms of the loan should be included.  In addition, you should include a contingency clause that makes the contract "contingent or conditional" on your examination and approval of the buyer's financial qualifications.  If they are not to your specified satisfaction, you want to be able to legally walk away from the deal without penalty.

Minimize your risk.  Get a sizable down payment.  The more money a buyer has invested in a home, the less likely they are to default unless it is absolutely unavoidable.  And make sure that you have adequate collateral.  The property serves as security for the loan, and if the buyer defaults you need to know that the home is likely to sell for an amount sufficient to cover outstanding debts.  So confirm that the appraised value of the property is equal to or higher than the purchase price.

Establish your financial claim.  Have your mortgage recorded in public records to establish the priority of your lien, your financial claim, on the property.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.