Difficulties Buying a Home? Look for Seller Financing

The dust has yet to clear on the banking and mortgage crisis. Banks and other lenders (those still lending in the housing market, that is) are still formulating new guidelines and some buyers may have a harder time qualifying. But, at any given point in time, there are always a number of homeowners who must sell their homes and some need to sell fast. If you are looking for a home, have the ability to pay, but might not qualify for a conventional loan, you may want to concentrate your search on seller financed homes. Tell your professional real estate agent that you are interested in homes where the seller will “carry the paper.”

How does this work? In some cases, often because a home is hard to sell, or sometimes just because it has been on the market too long to suit the owner, a seller will agree to loan the buyer part or all of the money to buy the property. The seller's motivation may be to create an incentive to buyers who can't borrow enough from a bank or other lender to buy the house. Alternatively, the seller's reasons may be tax related; since financing the purchase allows the seller to spread out the income from the sale over a number of years. With few exceptions, though, this type of financing is limited to homes where the owner has already paid off the mortgage.

Seller financing can be carried out in one of two ways:

The first is for the seller to "take back" a mortgage on the house. The buyer signs a promissory note (promising to repay the loan) plus, either a mortgage or a deed of trust (this would allow the seller to foreclose if you fail to pay). In return, the seller signs a deed transferring title to you. Because you hold the title, you can sell the house or refinance even if the loan has not been paid off. But you must keep making the agreed-upon payments to the seller.

The second possibility is a “contract of sale” -- the seller retains the title to the property for as long as it takes you to pay off the loan. The contract you and the seller sign may also be called a “land sale contract,” or “installment sales contract.” It works like this: The contract states that the seller will keep title to the property until you pay off the loan. (You normally pay the loan off in a series of regular payments, similar to a standard mortgage.) After you pay off the entire loan, the seller signs a deed transferring title to you. Because the seller keeps the title over the life of the loan, you cannot sell or refinance the property until all payments are made.

A contract of sale is not as advantageous to the buyer, but it may be a way to get into a home when credit or income verification is a problem. It also is a way for the seller to provide “creative financing” to move the house, even if his mortgage has not been paid off yet. You make your payment to the seller and out of that, he can still make the payment to his lender. As long as there is not a prepayment penalty, you can always obtain your own financing and pay off the balance of the contract at a later date.

It never hurts to ask if seller-financing is available, and its one way you can get into a home even though the financial markets are still uneasy.