Seller Financing (Developer Financing, Owner Financing)
Seller financing is a loan provided by the seller of a property to the purchaser. The purchaser will make a down payment to the seller, and then make installment payments (usually on a monthly basis) over a specified time, at an agreed-upon interest rate, until the loan is fully repaid. In layman’s terms, this is when the seller in a transaction offers the buyer a loan rather than the buyer obtaining one from a bank.
To a seller, this is an investment in which the return is guaranteed only by the buyer’s credit-worthiness or ability and motivation to pay the mortgage. For a buyer, it is often beneficial, because he/she may not be able to obtain a loan from a bank. In general, the loan is secured by the property being sold. In the event that the buyer defaults, the property is repossessed exactly as it would be by a bank.
Seller financing has emerged as a way for people with poor credit a path toward home ownership in the area following stricter regulations placed on mortgage lending following the subprime crisis of 2008. Unlike a regular mortgage, in which the buyer gets the legal title to the house, the buyer in seller financing does not receive the legal title until they have fully paid off the purchase price of the property. This means that if a buyer misses a payment, they can be evicted and lose all money and interest put into the property. In addition, the buyer is often responsible for repairs, taxes and insurance, meaning that they have the responsibilities of being a homeowner without the rights of actually owning the property.
There are no universal requirements mandated for seller financing. In order to protect both the buyer’s and seller’s interests, a legally binding purchase agreement should be drawn up with the assistance of an attorney and then signed by both parties.
Drawbacks for Seller Financing
- The buyer could pay the loan in full but still not receive title due to other encumbrances not divulged by, or unknown to the seller- such as any liens received after the agreement date.
- The buyer could make payments faithfully, but the seller might not make payments on any financing that may be in place, thus subjecting the property to foreclosure.
- The seller might not get the buyer’s full credit or employment picture, which could make foreclosure more likely, and depending upon the security instrument that was used, foreclosure could take up to a year.
- The seller could agree to a small down payment, only to have the buyer abandon the property because of the minimal investment that was at stake.