Seller financing home. What do I do next?

[LORIE DYE]

My husband and I live in Tennessee, and made an offer on a home for $95,000 with $5,000 down at 6.5% for 20 years with owner financing. The owner's don't owe anything on the home and bought a new home a couple of years ago while letting the home sit vacant.

We received a call Sunday night letting us know that they will accept our offer.

So, my question is, where do I go from here? I'm trying to get this taken care of with the least amount of money possible. I know I need to get a lawyer to do the deed of trust and file it. But, I've seen at law depot, and other law websites that I can create this document myself for a cheaper cost. Would it be ok to do this?

What else do I need to do? Title search? How much do those cost?

Also, we agreed to start making payments on August 1, but we will be making the down payment next week. Is it normal to ask the couple if we can start cleaning the home before we move in?

Any advice/information would be helpful.

[Jon Holdman]

Hi @LORIE DYE and welcome to the site.

It sounds like you've never been involved in a real estate transaction before and you aren't working with an agent.  Normally your buyer's agent would work with the seller's agent to get you and the seller through this process.  Without one you are going to have to manage this process yourself.  If I'm mistaken and there are agents involved, they should be helping you with these questions.

The specific processes and documents involved vary from state to state.  Hopefully someone from TN can give you specifics.  I've never closed a deal in Tennessee, so I don't know the details of their processes.

You can create all the documents yourself and take them down to the county courthouse and record them.  Given the questions you're asking I STRONGLY advise against that.  That's the cheap way to do it, but the odds of you doing everything correctly by yourself are low.  And the consequences of an error, such as losing the house, are high.  So, you need to hire an attorney.  Sorry.

The process of creating and signing all the documents, exchanging money, and getting everything recorded is called "closing".  In many states closing is done at a title company.  In some states, especially in the northeast, they're done by attorneys.  I'm not sure about TN.  Find a title company in your town and call them.   Tell them you are buying a house directly from an individual and you are doing owner financing.  Ask if they do closing or if you need to get an attorney.  A title company or attorney may have standard forms for some of this that they can provide you.

The owner carried loan will require care, assuming you are going to be living in this house.  If so, that loan falls under a number of legal regulations that you cannot avoid.  These are mostly in place to protect you, the borrower.  Specifically Dodd-Frank and the SAFE act.  You MUST have an attorney assist you with these and you may have to have a mortgage originator.  Doing this yourself with forms you find on the internet will almost certainly result in an invalid loan.

The closing process typically starts with a purchase and sale contract.  Your state will have one (google "Tenessee real estate purchase contract" and look for something from a state site).  A title company may be able to provide one, too.  You and the seller would fill that out.  Then it goes to the title company and that starts the ball rolling.

Typically "earnest money" accompanies the contract.  This is not the same as the down payment, but does count toward the purchase.  This can be whatever you and the seller agree to.  Typically about 1% of the purchase price, but it could be $10 if the seller agrees.  This would be a check made out the the title company  and goes with the contract to the title company.

Then you or your attorney will provide the loan documents to the title company. These will specify the down payment and terms of the loan. The title company will use this information when they prepare the HUD-1 settlement statement.

The title company will also do a title search and issue a title insurance policy.  This ensures the seller is providing you a clear title to the property.  This is typically paid for by the seller.  If they refuse to pay, you should pay for it yourself.  If the seller tries to convince you this is unnecessary, then beware.  This is a BIG red flag there is an issue.  You also want a warranty deed (or general warranty deed or whatever its called in TN) not a quit claim deed or some other form of deed.  A seller offering you a quit claim deed and advising against title insurance is a HUGE red flag and probably means you're about to get shafted.

The title company (or attorney) will have a number of fees for their work and also will charge you recording fees and other state, county or local fees.  They take all these fees and the loan info and account for your earnest money and come up with bottom line amounts you will need to bring to closing. You say you're making the down payment next week.  No.  You may hand over the earnest money next week (though it goes to the title company or closing attorney, not the seller) but the bulk of the down payment is usually handed over at closing.  You typically are required to bring a cashier's check made out to the title company to the closing and then they will issue a check to the seller for whatever money they are getting.  The check you bring is probably going to be bigger than your down payment because you will have additional costs.  And the check to the seller is going to be less than the down payment because they have costs, too.

The contract you and the seller write will specify when you get possession.  Possession is typically gained at closing.  Closing won't happen instantly.  Unlikely it will be next week.  Maybe by the end of the month.   The date you get possession is when you get the keys.  The house is yours as of that date.  Based on the statement you are going to start making payments on Aug 1, that date should be no later than July 1.  Mortgage payments are made in arrears, so you would only owe a payment on Aug 1 if you've had possession starting July 1 or earlier.  This is different than rent which is paid in advance.  If you do manage to close sooner than July 1 then you will typically pay interest from the closing date to June 30 at closing.

The title company will also pro-rate taxes.  The seller will owe you property taxes from Jan 1 2014 until the closing date.  This typically shows up as a debit on the seller's side and a credit on your side.