What is seller financing?
by 
Real Estate Guy
ANSWERS: 4
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Homeowners who are anxious to sell often consider seller financing, which may include taking back a second note or even financing the entire purchase if the seller owns the home free and clear. Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller's favor. These special circumstances must be acceptable to the lender who makes the first mortgage on the property. The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and seller. It is critical to thoroughly evaluate the creditworthiness of the buyer first. Fear of default makes many sellers reluctant to take back a second. But seller financing can bring a higher price plus complete the sale sooner in some situations. Resources: * IRS Publication 537, "Installment Sales." Order by calling (800) TAX-FORM.
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It can be a very useful tool in bringing buyers and sellers together to close a deal. It can, in fact, be extremely beneficial to both parties given the proper circumstances. Not only used by the late-night info-commercial creating-wealth-with-no-money-down genre, seller financing is also a very viable mainstream option to help sell real estate.
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Seller financing is usually a Contract For Deed, although Private Mortgages and Deed of Trust are among the instruments used to broaden the market when selling real estate. How does this expand the market? The seller does not have to comply with rigid underwriting guidelines, if they are willing to assume the risk of loss. (e.g., lower down payment, low credit requirements, etc.) In any event, a traditional title or closing company is required to properly register the transaction, although there may also be fewer closing costs in some States. I offer executive homes for a builder on which we extend 7.99% Seller Financing (on Contract For Deed). My "underwriting guidelines" will accept median credit scores as low as a 600, income review for only 12 months, and LTV as high as 97% on homes selling for as much as $800K. Banks cannot or will not carry such risk at anywhere near 8%. Furthermore, most jumbo loans are limited to 90% LTV and carry interest rates one percent lower -- plus the indignity of PMI, of course! Do ya think a few people with stellar credit might otherwise be tempted to take us up on these CDs? ;-)
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When the seller provides the financing and you don't have to go to a third party.
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