property. The seller agrees to sell the property in installment payments
instead of a lump sum, the seller agrees to take part of the purchase price in the form of a loan
to the buyer, or some combination of financing that allows a buyer who does not have enough money
to put down or cannot get enough of a loan to buy the house.
There are legal and ethical ways to do this and have the seller and buyer protected.
Of course where money is involved, there are under the table, unethical ways. We will
only address the legitimate and advise you to do likewise.
Types of Seller Financing
Sale on Contract or Installment Sale
An installment sale is a sale of property where the seller receives at least one payment
after the tax year of the sale. This is the old standby of seller financing. It leaves the buyer
unprotected until the very last payment is made, because the seller retains title to the property
until then.
Partial Seller Financing
If the buyer can qualify for a mortgage, but for less than the purchase price,
the buyer's mortgagor may agree to let the seller take back a second mortgage for the
difference between the purchase price and the qualifying amount. This is a more complicated deal
and the mortgagor has to agree to it as well as both parties.
In some ways, both the seller and the buyer are better off than with a sale on contract.
The seller gets most of her money and the buyer does acquire some ownership interest in the property.
Seller's Contributions
Buyers like seller contributions. Why not? The more a seller "helps" a buyer to buy her house,
the closer the buyer's mortgage gets to a 100% or more of the value lof the house. This puts lenders at
higher risk should a foreclosure be necessary. Most mortgage lenders, especially today, set very
strict limits as to how much the seller can contribute. Typically it is in the 3% range. The key
here, whether it is a seller paying closing costs or giving the buyer an sum of money is to be
upfront and truthful about the "source of funds."
Rent or Lease with Option to Buy
Traditionally this has been popular when houses or other real estate are hard to sell.
The buyer signs a lease that may apply part or all of the rent toward buying the house,
if the buyer decides to exercise that option. Most of the time, these agreements give the renter
a right of first refusal to protect her. The seller is protected by putting a time limit on the
lease and option. This way if the buyer does not exercise the option to buy, the seller can then
sell the house.
More Basics:
Credit Check, including pay stubs and references. Make sure you get this information about
anyone you are going to help finance.
Proof of Insurance. Have yourself named as an additional insured on your buyer's policy, if your buyer is
responsible for the homeowners insurance. This way you will get notice if payment is not made or other potential problems occur.
Proof of Tax & Assessments Payment. This should be public information and you should check be
checking to make sure these payments are made.
Legal Requirements: As with any important business dealings, it is best to get a lawyer involved
to make sure you are protected. This advice also applies to the buyer.
Keep in Mind: Selling your house while keeping your mortgage and taking back a second mortgage
that includes the amount of your original mortgage is called a wraparound mortgage.
Wraparound mortgages may be illegal or forbidden under the terms of your mortgage contract.
To enforce this, your mortgage contract probably has a due-on-sale clause, meaning, if you try
this, the mortgagor can (and probably will) accelerate the note and demand payment for the entire
amount.
Rent Option to Buy
also, see the articles in Loans for more information.
In coming articles we will discuss each type of seller financing, its benefits and its pitfalls to both the seller and the buyer.
