What is Seller Financing and How does it work for the buyer and the seller?
Seller financing is a wonderful way to facilitate both the buyer and the seller. It is a type of short term “bridge loan” where the seller carries the contract until the buyer is able to refinance and get a loan. For Seller financing to succeed it is best to have an exit strategy put in place at the time a contract is written up. The exit strategy entails the buyer speaking to a lender or a credit repair company, to prescribe a remedy for why they are not able to get a loan, and set a time frame up with actions, to get the permanent financing.
A “contract for deed” does not transfer title into the buyers name; however it does give the buyer “equitable title”. This means that they have rights to the property owner without title. It also eliminates a judicial foreclosure when the “Cancelation of Contract” is signed at closing which was agreed upon before hand by both buyer and seller.
To circumvent a default, a pre-signed “cancel contract document is signed at closing with terms if payments are not made. This way the judicial system does not need to be involved and only an eviction if issue is not remediated.
A down payment IS necessary in seller financing and usually needs to cover expenses, a 3rd party escrow agent for payment, and a few months of mortgage payments, if there was a default.
Just because a buyer is not able to get a loan conventionally, does not mean that they are a bad risk. Sometime circumstances prevent a buyer from getting a loan such as being a self employed, or had a hardship. When designing seller financing options, I always believe that using a lawyer to finalize the paperwork. The cost is different for each contract, but I have found usually is around $400 per side or less depending if a Title company has their own lawyer on the premises. This gives both the buyer and the seller confidence that the papers are done with both parties in mind for a successful transaction.
FHA HUD document 4145.1 states that seller financing can be use for refinancing for: “a land contract, contract for deed, or other similar financing arrangements in which the borrower does not have title to the property.”
What are the steps for Seller Financing for a buyer?
1. First speak to a lender and identify the problem as why you are not able to get a loan.
2. Identify a solution and how long it will take to fix the issues so that you have an exit strategy.
3. Call me and I will help you get started!
What about a Due on Sale Clause?
The bank states that you may be in default IF the title were to actually change. With a Contract for Deed, the title does not change. In any event, if a default were to rise, all that needs to be done is to cur it, giving the title back to the seller that mirrors the same terms as the written contract.
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