When the seller provides the buyer a mortgage it usually benefits both homebuyers and sellers.
By JAZ Zydenbos, Keller Williams Realty Elite Partners located in the Sunshine State of Florida.When the seller provides the buyer a mortgage it usually benefits both homebuyers and sellers.
Owner/Seller financing of a property can be a vital tool in a tight credit market and in most markets of still falling values, as is the case with most of Florida. It allows sellers to move their property in much less time and receive top dollar for their hard investment. And certainly buyers, good credit or not, delight in far less stiff qualifying and money down requirements, more flexible and negotiated rates, and far more flexible mortgage terms on their dream home that ordinarily should be out of reach.
And the prospects of finding sellers willing to take the risk of playing bank in a declining price market are represented by less than 10% of all homes on today’s market in Florida. Fortunately I know where most of these seller financed homes are located throughout the state and I have virtually little competition matching both eager buyers and sellers.
There are serious considerations with these transactions as they are not without possible legal and financial ramifications. But by taking the right precautions in hiring an experienced real estate agent and title company or attorney, sellers can minimize most obvious risks.
The Nuts and Bolts of Owner/Seller Financing
With owner/seller financing, the seller becomes the bank. Rather than supplying money to the buyer, the seller offers credit to their buyer for the agreed to sales price of the property, less the down payment. Then the buyer and seller execute a promissory note with the terms and stipulations of the loan. They record a mortgage or deed of trust, in some states with the county clerk of the court, at least here in Florida. Then the buyer pays back the loan over a specific time, along with interest or not determined by the seller.
These notes are often two to five years – and depending on the sales price and market, amortized from 12 to 30 years but with a balloon in the two to five year range. The idea is that within a couple of short years, the home will have appreciated enough in value or the buyers' credit score and debt to income ratio has benefited them enough that they can obtain a mortgage with a bank or broker.
I insist that all of my prospective buyers enroll in a mutually agreed upon credit-counseling course upon signing a purchase agreement if their mean scores are less than 640. The incentive to do this could mean the capping of the interest rate at the end of the first year or an increase in interest rate should the buyer(s) have not accomplished this counseling.
From the seller's perspective, the short length loan period is pragmatic. Sellers or their heirs in the event of an estate sale do not have the time or money to wait for 30 years until mortgage balance is paid up. Although some sellers/investors love the cash flow and could always sell the mortgages off to other investors at a discounted rate. Further, sellers their exposure on extending credit in these uncertain job market times any longer than absolutely possible.
Here are several Owner/Seller Financing Methods. A glance the most every day instruments of seller financing.
The all inclusive type mortgage. In an all-inclusive mortgage or all-inclusive trust deed, the seller holds a promissory note and mortgage for the entire amount of the purchase price, less any down payment.
The land contract. Land contracts do not give the title to the buyer, but supply the buyer with what in legal terms is called equitable title, a temporarily joint ownership. The buyer makes monthly payments to the seller and, after the very final installment; the buyer receives the deed in their name.
Lease purchase or lease option. The seller provides the buyer with “equitable title” and leases the property to the buyer for a specifically written term. Here in Florida, leases are for a term of one year. When the buyer executes the lease purchase contract, the buyer receives title and typically obtains a loan to pay the seller.
Some or all of the lease payments can be credited against the agreed to purchase price. Numerous variations exist on lease options. I can suggest several real estate attorneys or contact your own for advice. Florida real estate laws are different from any other state, so contact one of our professionals for advice.
Conventional, FHA and VA Assumable mortgages. Assumable mortgages provide the buyer to take the seller's place on the existing mortgage provided they qualify under the lender’s credit criteria. FHA and VA loans, as well as a few conventional adjustable mortgage rate (ARM) loans, are assumable with the lender’s okay. Again check with your financial advisor, CPA, or real estate attorney before assuming your loan is assumable.
Get a Professional to Assist You.
Both the buyer and seller will more than likely need an attorney or a real estate agent or both to write up the contract for the sale of the property, the note, and any other necessary paperwork to keep it legal and simple to understand. But it is the best deal for a quick sale for the seller before the value of the home sinks any further.
My real estate associates, attorneys, buyers and sellers fairly much agree that owner/seller financing certainly beats waiting around any longer looking for a cash buyer or a qualified finance buyer in a highly competitive, especially with a declining price market here in Florida. If you check out Trulia in the Tampa area on homes, last month, in December of 2010, the value of a $130,000 home fell 6%.
Something to consider is that paying taxes on owner/seller financed sale can get complicated and very involved. Sellers should use financial or tax licensed professionals to provide advice and follow through in these matters.
Keeping the Seller's Risk Low
Most sellers are hesitant to provide a mortgage because of trepidation that the buyer will stop making timely loan payments. But you as the seller can put in place measures to virtually eliminate the risk of default. A professional can help the seller do the following:
Get a loan application. I usually refer to one of my respected associates who are local mortgage brokers looking for future business from the buyer. They will help the seller obtain a loan application from the buyer and thoroughly verify all of the information.
I coordinate this added service as of no additional charge to the seller. This can also include pulling a credit check and verifying employment, assets, and clerk of the court records, judgments, liens, references, and other background information. The ancillary direct cost for this application should be born by the buyer or added to the closing statement as a buyer expense.
The seller should by the final judge of approving of the buyer's finances. The written purchase agreement which is constructed by the Florida Bar Association and the Florida Association of REALTORS® specifies the terms of the transaction along with the mortgage balance, rate, and term. All of this must be contingent upon the seller's due diligence of the buyer's immediate and future financial position.
Have the property be the collateral of the mortgage. Absolutely no unsecured loans. The mortgage must be secured by the home so the seller can foreclose if the buyer defaults. The property should be professionally appraised at a value equal to or higher than the purchase price. Price it too high and you have put the buyer into immediate default when the balloon comes due.
Get a good down payment at minimum of 15% plus closing costs. I feel better with 20-25% down if available from the buyer, but each situation is different for buyer and sellers. Like banks, you want to have a cushion against the risk of losing your equity and investment. This also gives the buyers sweat money into the home and negates the possibility to abandon you and the home should financial trouble arise. Otherwise, in a falling market, foreclosure could leave the seller with a home that can't be sold to cover all the costs.
Negotiating the Mortgage
As with an ordinary mortgage, seller financing is negotiable for both buyer and seller alike. But to be successful, all parties must win in face of the risks involved. To decide upon an interest rate, compare today’s prevailing rates that are not specific to individual lenders. You can try www.BankRate.com and www.HSH.com -- check for daily and weekly rates in the area of the property if you wish to sell in Florida or elsewhere, and never the national rates. If the buyer has a great score in the 800's keep your rate low. If the buyer is in the 5's to 6's charge accordingly.
The seller should also think about getting professional help in order to set the interest rate. A an accomplished real estate agent such as myself can help you with this just we provide comparable analysis on the price of homes we can provide comparable interest rates on other owner financed homes in your area.
Be prepared to offer a competitive start rate with lower initial payments, and other concessions to attract better credit scored buyers and provide incentives for them to find their conventional lender within the next year to three years.
It’s uncommon practice for sellers to charge buyers points where each point is 1% of the loan amount and other mortgage costs, they often can afford to give a buyer a better financing deal than the bank. And they should, if they want top dollar today for the property.
That doesn't mean the seller must or should give in to a buyer's every wish and that is where an experience owner/seller finance experience agent such as myself comes in. The seller should expect a good return on their investment in owner/seller financing.
An attractive owner/seller mortgage that comes with very few costs and lower monthly payments that should translate into a top dollar value for the home you want and need to sell now. The market here is predicted to continue to fall in prices late into 2012. So sell now! There are plenty of buyers with cash with the willingness and ability to pay your mortgage timely.
Loan Servicing Companies are good to hire.
To help ease the monthly billing burden burden, sellers should seriously hire a loan servicing company to mail statements, collect payments, and otherwise do the monthly paperwork associated with the mortgage sellers hold. There are a few who specialize in taking care of one home mortgage sellers.
I think that gives you a broad overview of owner/seller financing. Next time I will share with you some real recent success stories, testimonials and situations to absolutely avoid.
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If you are a new to the world of purchasing a home and tired of renting, the journey of seeking homes and getting a loan can be quite exhausting. You need to get help from someone like myself who really knows and understands how to negotiate the best deal for you and that goes for sellers too who would like to achieve a better result in this market. If you would like to get on my daily update of owner financing homes available in all of Florida just click here. If you want to find out how you can purchase the house you’ve been wanting anywhere in the Sunshine State of Florida, you can call me anytime at 800-819-4793. JAZ Zydenbos, Keller Williams Elite Partners.
Oh yes, if you’ve been considering a career in real estate anywhere in the US, and Canada with the fastest growing real estate company in North America, call me about that too or click here for more information. now this is JAZ Zydenbos, Keller Williams Realty Elite Partners wishing you financial success in owner/seller financing now and the years ahead. My direct line is (800) 819-4793. My website is at www.JAZHomeBuys.com or email me at JazzSold@gmail.com . 
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