Seller Financing is often misunderstood. Not because it’s a complicated process or because it’s impractical, but because it’s little talked about and not well known.
Unfortunately, these seller financing myths (or lack of information) are stopping homeowners and homebuyers from using private mortgage notes as an alternative to traditional bank loans.
Cutting the bank from the deal means the seller takes on the role of the lender. Rightfully so, this can be scary — both for the seller (that becomes the bank) and the buyer (that becomes the borrower).
Instead of accepting a lump sum, the seller receives monthly payments from the buyer and trusts they will pay timely. The buyer agrees to a Note and Mortgage (or Trust Deed) without the backing of a large bank handling their payments.
While simple enough and with it’s own benefits, it’s easy to see how a few seller financing myths began circulating.
Here are 5 Seller Financing Myths You Should be Aware of Right Now!
Myth #1 – Offering Owner Financing is Too Risky
All investments come with risks, and owner financing is no different.
The good news? There are ways to control those risks. Leaving you with all the benefits at a reduced risk.
First, qualify the buyer and set advantageous terms that add resale value to your note, making it worth more should you decide to sell the note down the road.
What are some beneficial terms and risk-reducing practices?
Higher interest rates, requiring a down payment, checking the buyer’s credit history, making sure the buyer can afford the payments, collecting escrows for taxes and insurance, and using a third party to service the payments, all help to reduce the risk of accepting the role of the “bank.”
Myth #2 – Once Agreed Upon, You’re Stuck With It
No one likes feeling stuck. Especially when you want out of your seller-financed note.
Fortunately, you can sell the remaining future payments to a note investor. Even if the buyer has stopped paying, you can still find investors for a defaulted owner-financed note.
Whether performing or non-performing, note buyers will consider buying your note. It’s as easy as requesting an online quote to find out what your note is worth and start the selling process.
Myth #3 – You Can Only Offer Seller-Financing if You Own the Property Free and Clear
While ideal and more manageable to own your property free and clear before selling, it’s not necessarily a requirement of owner financing.
However, before offering seller-financing check your original loan terms, confirming that a “Wraparound Mortgage” is permissible.
This means that the seller continues making payments on their original loan while the buyer makes payments on the owner-financed loan. Also be sure to use a third party servicing company to disburse payments to that underlying debt each month.
Myth #4 – Seller Financing Only Benefits Those With Bad Credit
Perhaps one of the most widely spread seller financing myths is that it’s only for people with bad credit.
That’s just not true.
In fact, seller financing doesn’t just benefit the buyer — it helps the seller as well.
While it’s true that buyers with lousy credit look into seller financing as an alternative when denied traditional funding, there are other benefits of offering or accepting seller financing.
- Interest Income. By accepting to be the bank, you also receive monthly interest income at a favorable rate backed by a property you already know.
- Selling Hard to Finance Properties. Sometimes banks refuse to finance specific properties like mobile homes, land, less-expensive homes and more. In those instances, seller financing can help you sell your property.
- Reduce Marketing Times. Sometimes your house won’t move. Make it more attractive by cutting out the middleman and red tape.
- Larger Buyer Base. It doesn’t make sense to sell to a buyer with terrible credit. Rather look for buyers that can afford the payment but might have just missed the mark of conventional financing. This could include self-employed buyers, buyers just shy of the minimum credit score, or buyers working hard to establish a credit history.
Myth #5 – Seller Financing is Illegal
Absolutely not true!
The Dodd-Frank Act changed the game. But, it didn’t change the legality. Instead, it set new conditions and requirements, further protecting both the buyers and sellers.
Want to be sure your deal follows the rules? Have it looked at by a legal professional and a mortgage loan originator before closing.
Don’t let seller financing myths stop you from offering owner financing. After all, it doesn’t just benefit the buyer — it benefits everyone involved.