Seller financing can accelerate the sale of your home and can maximize your return on your real estate investment. Learn how to finance the sale of your home.
When selling your home, there are many ways to attract prospective buyers and to maximize your profit. One way to attract a larger pool of buyers is to offer to finance the purchase of the home yourself. While this is a potentially lucrative position, it can be wrought with perils if you aren’t careful.
First, ensure what you want to do it legal. Homes with an existing mortgage may not always be titled to the new buyer without paying off the first mortgage. As soon as the deed is titled, your existing mortgage lender may call the loan. If you cannot afford to pay off the existing mortgage and the new buyer cannot obtain financing, you could face a lawsuit. Check with the current lender if you have a mortgage to make sure you can carry a note for the new buyers.
In some cases, a lease/option is the better way to go. You are still financing the purchase of the home, and ensuring the sellers can buy the home at a reasonable price within a set period of time. The only difference is the home is not deeded to the new buyers, and part of each payment is credited toward the purchase price. This option is best exercised when the person buying your home cannot obtain traditional lending at this time. Typically, lease/options are two years in duration and afford the buyer time to build a high enough credit score to complete the purchase with traditional bank financing.
If you do not have an existing mortgage or are cleared by the current holder of your mortgage to complete the transaction, you will still want to secure a significant down payment. Pull a credit report on the prospective buyers. If their score is particularly low, ask why. Ask for a higher down payment the lower the score goes. The higher the down payment, the less risk you take in offering to hold the mortgage. Down payments are not refundable, and if your buyer walks away, he loses his investment. A struggling family is a lot less likely to leave behind a $15,000 deposit than a $1,500 one.
Review the published mortgage rates before deciding how much interest to charge. Excellent credit scores afford more consideration than poor ones. Bad credit lenders often charge in excess of 13% for the mortgages they write. Next, determine the duration of the loan. You can decide to carry the mortgage as long as you wish. Many people are comfortable with a 30 year note, though you may not want to wait 30 years to fully cash out from your property. Mortgages are amortized over a set period of time. You can carry a mortgage for one, two, five, ten or twenty years or anything in between and base it on a 30-year amortization schedule. This provides you with the highest rate of interest return while lowering the borrower’s monthly payment.
You will use a title company to record the transfer of the deed in most cases. You may also wish to have the title company collect the monthly payments from your borrower and to disperse the monthly payments in accordance with your wishes. They assume the responsibility of reporting the loan to the credit agencies and for ensuring the interest is calculated correctly. This is especially helpful come tax time when your buyers may want to write off their interest. They also prepare the W-9 form you will need to attach to your tax return to report your interest as earnings.
You need to ensure the title company records the mortgage on the property properly, and secures a lien against the property in the event the buyers stop making their payments. Foreclosing on a property can be difficult and can take a long time to complete. During that time, your buyers can cause a lot of damage. Take out an insurance policy to guard against this type of damage in the event you need to foreclose on the property.
You may wish to consult with a lawyer to have the loan documents created. Many lawyers will be able to insert clauses that will help you recoup some of your losses in the event you need to foreclose on the property. Consider adding rules about the way the buyers shall maintain the property until bank financing is secured. This helps to ensure the property is kept in good shape while the buyers occupy it. By maintaining the property’s value, it makes certain you can sell your property with a minimal amount of effort to a new buyer in the event the current buyer’s deal falls through.
Offering seller financing can be a lucrative way to increase your net worth if you follow these tips.
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