Creative Financing
With the changes in the market, credit challenges, and excess inventory conditions there has been an increasing demand for creative financing. Lease and lease purchases are common as buyers and sellers find ways to make profitable transactions.What is Seller Financing?
As the seller, you have the option of financing the buyer's purchase with the equity you have in the property. You can finance part or an entire mortgage for the buyer. It is my advice to have these contracts drawn up by a real estate attorney.Carrying Back a Second Mortgage
When "carrying back a second mortgage", the seller loans the buyer part of the seller's equity. In this scenario, the buyer would finance the majority of the loan with a traditional mortgage lender and finance the remaining amount with the seller. Typically the buyer would pay a slightly higher interest rate on the loan financed by the seller. There are risks associated with default from the seller as well as the buyer. Seek professional advice.Financial Issues - The Tallahassee Home Purchase Price
The seller and buyer's mutually agree upon a purchase price for the property. As a seller, you should know up-front if a buyer would like you to finance the deal. Knowing that you will be financing the deal may affect your willingness to make adjustments to the sales price.The Down Payment
The size of the down payment is often a correlation of the buyer's commitment to honoring the mortgage contract. The larger the down payment the buyer invests, the stronger his/her motivation to protect the investment. In addition to making the monthly payments, the buyer's commitment to the investment would include a willingness to maintain and upgrade the property, as well as make tax and insurance payments.The Interest Rate on a Tallahassee Home Mortgage
At a minimum, the interest rate you charge should match current interest rates traditional mortgage lenders are offering for loans of the same term. You may want to charge an additional percentage point as compensation for the work involved with servicing the loan. Consulting a tax accountant may be helpful in determining how profits from interest rates will affect you for tax purposes as well.The Tallahassee Home Buyer's Credit & Income
You'll want to review the buyer's credit history to determine the buyer's willingness to pay his/her debts. A credit report will give you a better understanding of the buyer's financial history. Red flags would include late payments and loan defaults. If a buyer has a less than commendable credit history, you may decide not to finance the loan or you may require a larger down payment. In addition to the buyer's credit history, you'll want to review the buyer's income sources. Is the buyer's salary sufficient to make the monthly payments? Does the buyer have additional income sources that could be accessed if the buyer lost his/her job? It is not uncommon to ask for verification of income and assetts as proof of larger downpayments during negotions as well.Amortization
The amortization period is the length during which the loan is repaid. The longer the amortization, the longer you are at risk that the buyer will default on the loan. Balloon payments are often neogitated terms of contracts.Balloon Payment for Financing Your Tallahassee Home
A common practice is to have the full amount of the loan due on a certain date, usually in 5 to 10 years. As the lender, this gives you a profitable short-term investment with the provision that your principal investment will be recouped in just 5 to 10 years.The buyer is usually in a better position to secure traditional financing after 5 to 10 years. Both the buyer's equity in the property and record of timely mortgage payments can help the buyer secure a loan to cover the balloon payment.
Escrow for Tax and Insurance
Lenders typically require borrowers to pay 1/12 of their annual taxes and insurance costs as an escrow payment due with each mortgage payment. Then, the lender makes the borrower's annual tax and insurance payment. While this adds time and hassle to the seller-financer, it also protects you from the unfortunate situation of having a buyer make his/her mortgage payments but not tax and/or insurance payments.Lender's Title Insurance
A smart investment is a lender's title insurance policy. I would recomment this be specified in your cntract and included in closing costs. The policy protects your lien on the property from being defeated by a prior lien or other interest in the property, which, if exercised, would wipe out your security. Things that can affect your rights as the seller-financer include marriage, divorce, death, forgery, a judgment for money damages, a failure to pay state or federal taxes, and more. Be sure to include the cost for your lender's title insurance as one of the buyer's closing costs.Closing the Sale on Your Tallahassee New Home Purchase
Both buyer and seller will be responsible for paying the usual closing costs. You will also want the buyer to pay all the costs associated with setting up the mortgage financing. This would include the cost of having your attorney create the mortgage note.Whether financing with traditional conventional mortrgage or utilizing offers of seller financing, having a full understanding of all terms and conditions can save you from legal and financial pitfalls.
All contracts should be reviewed by your lender, and in the case of seller financing by a qualified, currently licensed real estate attorney. For recommendations of real estate attorney's consult your Realtor or local Board of Realtors.