What is Seller Financing?

Published by Thomas Herold in Banking, Economics, Real Estate

'Seller Financing' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Seller Financing turns out to be a loan that a business or property seller offers to the buyer. When seller financing is provided, the buyer generally gives a down payment amount to the seller. The balance of the purchase price is paid to them using installment payments that are typically monthly. This is accomplished at a certain time of the month and for an interest rate that the two parties agree to, until the loan itself has been completely paid back.

Seller provided financing is not governed by any regulatory body or set of laws. Because this is the case, for a seller and a buyer both to protect their interests, a purchase agreement that is legally enforceable in a court of law needs to be drafted by an attorney. The two parties, buyer and seller, can then sign this agreement to make the transaction fully legal.

There are many benefits offered in pursuing seller financing. Both the seller and the buyer of a real estate property can realize significant closing cost savings that typically amount to thousands of dollars. The interest rate, loan conditions, and repayment schedule may also be negotiated with seller financing. Borrowers are not forced to go through a loan qualification process via a loan officer or underwriter either. Private Mortgage Insurance is also not required to be paid. Buyers are able to make specific requests as part of the condition of buying the property too, like having the appliances included in the sale.

Sellers also receive benefits when they provide seller financing. They might end up with a better return on the investment if they get their equity payments with interest. They similarly might be capable of obtaining a better selling price and interest rate. They could choose to sell the property in “as is” condition, meaning that they will not be required to cover the costs of any repairs that the property needs. Finally, the seller is capable of picking out the security documents that he or she believes best serve the interests of getting the loan paid off, such as deeds of trust, mortgages, or land sales documents.

There are some downsides to seller financing that should be carefully considered as well. While the buyer might make the payments on time, the seller could choose to not pay off more senior financing on the property, which would cause the property to be foreclosed on. Besides this, the buyer might not be given the title to the property if there are problems tying up the property title, even when he or she paid off the loan as per the agreement. The buyer also does not benefit from the safeguards offered by mortgage insurance, home inspections, or appraisals that will ensure that he or she is not paying too high a price for the house.

The seller also encounters risks with seller financing. If the seller does not get an accurate picture of the buyer’s ability to pay for the property, then he or she might suffer through a foreclosure. This foreclosure can require as long as a year to complete. Finally, the seller might accept a smaller down payment and then find that the buyer later abandons the property and payments since he or she puts a limited investment into the property.

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The term 'Seller Financing' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.