Seller Financing: The Best Kept Secret When Buying a Home

You already know the current “buyer’s market” is a great time to purchase a home. There is less competition from other buyers. Motivated sellers are setting a realistic asking price. It’s a more normal home sale market as compared to the record breaking volume of the last few years.

But there’s another reason to buy a house now. Anxious sellers are offering sales incentives. A few offer vacation trips, higher sales commissions to real estate agents and their buyers.

However, there is one sales incentive that most listing agents and home sellers forget to offer: During the last five boom years, the seller’s market in many cities usually meant all-cash sales.

Buyers could easily get new home loans at low mortgage rates. Those days have changed, as mortgage rates have increased, and many institutional lenders have toughened their rules. Yet there is still one home mortgage source available virtually everywhere that agents, sellers, and agents often overlook.

It’s the easiest, least pricey way to finance a home. Especially if you are a short on cash or are in a position where a bad credit home loan is your only option when it comes to getting financing from major lenders, you’ll love this source of financing. Not every resale home can be financed using this source, but all you need is one.

This under-used home mortgage finance source is: The home seller.

With more than 50 percent of homes owned free and clear with no mortgage, those homes are the best candidates for seller financing. Smart purchasers ask their buyer’s agents to search the local MLS (multiple listing service) listings for homes listed with no existing mortgage. Those sellers are the best prospects for seller carryback mortgage financing.

Instead of sellers taking an all-cash sale and parking the cash in a bank or mutual fund earning around 5 percent interest, suggest the seller of a free-and-clear home carry back the loan at 6 percent. That’s usually a good way to ensure the best possible deal for both parties.

Whenever possible, try to meet the seller to establish credibility before presenting a purchase offer asking for a seller-financed mortgage. Below are five advantages of seller financing. In addition to earning a high above-market interest rate, there are many additional seller advantages of financing the home sale that include:

1. An easy sale for top dollar. Everyone knows all types of sales are easier when the sellers of the merchandise offer easy financing. Price often becomes a non-issue.

2. Vacant houses can be risky for sellers. If the seller has moved out of the house, this is usually a sign of a very anxious and worried seller, especially if the house has been listed for sale several months. Most sellers of vacant houses will listen to reasonable purchase offers, including seller carryback home mortgage terms.

3. The added safety of a mortgage or deed of trust on property the seller understands. The major reason sellers hesitate to carry back a mortgage for a buyer is they fear the sales will quickly become foreclosures as buyers default and can no longer make the payments.

4. Installment-sale tax benefits are another seller advantage, especially when the taxable profit exceeds the seller’s $250,000 or $500,000 principal residence sale tax exemption of Internal Revenue Code 121. If the property was not the seller’s principal residence, spreading out the capital gains tax over the years of receiving buyer payments is usually far better than paying a large capital gains tax in the year of the sale.

5. Ample down payment cash to pay the home sales expenses. In a typical case of home seller financing, the buyer makes a cash down payment of 10-20 percent of the sales price. This down payment is usually enough to pay all the sales expenses, including the realty agents’ sales commission.