What is Seller Financing?

Seller financing is a creative lending technique that allows the home buyer to take out a mortgage from the home seller instead of, or in addition to, a traditional bank. Some homeowners use seller financing as an incentive to draw in potential buyers. With seller financing, buyers do not have to meet the traditional lending standards set by Fannie Mae and Freddie Mac. Instead, they only need to meet the qualifications set by the home seller. In many cases, the seller is willing to be flexible in regard to credit score, income, down payment, and other issues.

Types of Seller Financing

There are three main types of seller financing: first mortgages, seller carryback mortgages, and wrap-around mortgages.

If the seller owns the property free and clear, he may choose to be the sole lender by offering a first mortgage. In this case, the buyer takes out a single mortgage through the seller. His monthly payments go directly do the seller, without any bank involvement.

More common is the seller carryback mortgage. A buyer takes out a typical mortgage from a bank as well as a smaller mortgage from the seller. Generally, this second mortgage is used to make up for a buyer’s lack of down payment funds. For example: a buyer may borrow 80% of the home’s purchase price from the bank and 20% from the seller. The bank is the primary lender, but the seller holds a lien on the property until the second mortgage is paid off.

A third option is the wraparound mortgage. In this instance, the seller maintains his own debt on the property after the sale. The buyer sends the seller monthly mortgage payments. The seller pays his own mortgage and pockets additional money. For example: The seller owes $50,000 on a home and pays 5% in interest to his bank. He sells the home for $100,000 with a 7% interest rate. Each month the buyer sends a mortgage payment to the seller. The seller then pays his bank the amount owed and keeps the excess. Read more…

Tags | seller carryback mortgages, Seller Financing, wraparound mortgages