Seller financing is a great tool that can put more money in your pocket when you sell a property and help you sell faster when market slows. Last month we discussed how this tool does that. Here are some tips on how to create seller financing as part of your property sale.
#1 – Advertise your property for sale with “Seller Financing Available.” You will attract more prospective buyers willing to pay full price.
#2 – Have an idea of terms you will offer. You are in the driver seat; you determine the interest rate, the length of loan, down payment and whether the loan will have a balloon payoff date.
Borrowers almost always want the lowest payment, lowest interest rate and lowest down payment they can get.
You, as lender, want the maximum for these parameters that buyer can afford in order to make your loan more secure and give you the best return. You can request more info at the “Sell your home faster” link on our web site.
#3 – When writing the purchase agreement, you can add language that permits renegotiation of loan terms later when you have received the seller credit income and employment information. If unfavorable/ higher risk information surfaces you can withdraw or change the loan terms you offer; e.g., seller finance loan terms are subject to review of buyer credit, income, employment, and completed loan application.
If unfavorable/ higher risk information surfaces you can change the loan you offer If unfavorable/ higher risk information surfaces you can change the loan you offer or exit the contract.
#4 – Know the regulations that apply. Seller finance loans on real property enjoy minimal restrictions. Do know the maximum interest rate allowed for mortgage loans in your state and avoid usury.
If you are selling to a buyer who will occupy the property as their principal residence, then more regulation applies. You must be sure your buyer has adequate income to pay the loan; you must also follow Dodd Frank regulations, and SAFE Act requirements. You should check if HPML (high price mortgage loan) requirements will apply for your interest rate.
Using a licensed mortgage loan originator is required if you are doing more than three loans in any 12- month period.
#5 – Include essential terms.
- Promissory note must state interest rate, and payment amount and payment due dates.
- Adding late date and amount of late fee is advisable.
- Adding an increased default rate is advisable.
- Mortgage or Deed of trust must contain correct legal description of property and require insurance and tax payments be kept current.
- Further language to allow lender to pay and demand repayment for amounts that threaten the lien position of the loan.
Seller financing offers another exit strategy to real estate investors and businesses, and there is an active market of buyers for these loans should you need liquidity. You can sell part or all of your seller finance loan for lump sum cash quickly.
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