SELLER FINANCING
How are the rates set
for seller financing?
What are the benefits of seller financing?
What is seller
financing?
Question:
How are the rates set
for seller financing?
Answer:
The interest rate on an
owner-carried loan is negotiable. Ask your agent to check with a lender
or mortgage broker to determine the current rate on institutional first
(or second) loans.
Seller financing typically costs less than conventional financing
because sellers don't charge loan fees (points). Interest rates on an
owner-carried loan will also be influenced by current Treasury bill and
certificate of deposit rates. Sellers usually aren't willing to carry a
loan for a lower return than they would earn if their money was invested
elsewhere.
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Question:
What are the benefits of
seller financing?
Answer:
Seller financing offers tax
breaks for sellers and alternative financing for buyers who can't
qualify for conventional loans.
If you are a seller, the risks you face are the same as those facing any
lender: Is the borrower a good credit risk? Will the property hold
enough value over time to allow for the repayment of all loans made
against it?
You should run a full credit check on the borrower, require hazard
insurance on the property and include a due-on-sale clause. There also
are financing, disclosure and repayment-term requirements that need to
be met. It is wise to consult a lawyer when putting together this kind
of transaction.
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Question:
What is seller
financing?
Answer:
Seller financing is when a seller
helps to finance a real estate transaction by taking back a second note
or even financing the entire purchase if the seller owns the home free
and clear. Usually sellers do this when a buyer has difficulty
qualifying for a conventional loan or meeting the purchase price.
Seller financing differs from a traditional loan because the seller does
not give the buyer cash to complete the purchase, as does a lender.
Instead, it involves extending a credit against the purchase price of
the home while the buyer executes a promissory note and trust deed in
the seller's favor. These special circumstances must be acceptable to
the lender who makes the first mortgage on the property.
The necessary paperwork is prepared by the title or escrow company after
the terms are worked out between the buyer and seller.
If you are a seller considering such an arrangement, it is critical to
thoroughly evaluate the creditworthiness of the buyer first. Fear of
default makes many sellers reluctant to take back a second. But seller
financing can bring a higher price plus complete the sale sooner in some
situations. For more information, contact the Internal Revenue Service
for a copy of its Publication 537, "Installment Sales." Order by calling
(800) TAX-FORM.
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