Please explain the mechanics of seller financing to me

[Chris John]

I keep seeing people say that they buy using seller financing.  I totally understand the potential benefits of that.  What I don't understand is the dirty details that they're using to accomplish this.  I have a few questions:

- Are people pretty much exclusively using seller financing on homes that are free and clear?
- If not, I'm assuming the use of wraparound loans.  However, I thought that banks didn't like wrap loans and pretty much killed them in the 80s.
- If wraparound loans are what's mostly being used, how are they structured?  One payment directly to the original lender with a side payment to the seller (I can't imagine sending the entire payment to the seller and just praying that they actually make the monthly payment with it)?
- Again, if wraparound loans are being used, does this impact the seller's debt ratio?
- Is there something else I'm missing besides a free and clear purchase or a wraparound loan?

Thanks!

[William Anderson]

Quote from @Chris John:

I keep seeing people say that they buy using seller financing.  I totally understand the potential benefits of that.  What I don't understand is the dirty details that they're using to accomplish this.  I have a few questions:

- Are people pretty much exclusively using seller financing on homes that are free and clear?
- If not, I'm assuming the use of wraparound loans.  However, I thought that banks didn't like wrap loans and pretty much killed them in the 80s.
- If wraparound loans are what's mostly being used, how are they structured?  One payment directly to the original lender with a side payment to the seller (I can't imagine sending the entire payment to the seller and just praying that they actually make the monthly payment with it)?
- Again, if wraparound loans are being used, does this impact the seller's debt ratio?
- Is there something else I'm missing besides a free and clear purchase or a wraparound loan?

Thanks!

 Chris, You seem to have a good grasp of the concept, I assume you are just checking to see if you are on target.  When the seller has no mortgage or a mortgage that can be cleared with the buyer's deposit, there is an opportunity for a seller-finance deal.

When interest rates were very low before the current administration, seller financing was not very appealing because a buyer could get a 3% loan.  With loans for credit-challenged people nearly 8%, a seller can do well with their proceeds.

I just wrapped up a seller-finance deal for one of my clients. The buyer had good credit but could not swing the ratios because of the cost of insurance. I listed possible seller finance when I posted the property on the MLS and the buyer latched on to it as a way to save the deal.

My client will earn 10% interest on a five-year balloon with a 30-year amortization.  If the deal had started today, I would recommend 12% interest.  I have a thing about trying to stay ahead of inflation by 4%.  The buyer has five years to obtain a better loan or come back to the seller and recast the loan at a different interest rate.

The wrap is problematic.  I have done a couple and on one the buyer broke our deal and accidentally notified the mortgagee that they had sold the property.  It was not a real problem because I had a financing package on hold for just such an issue.  They gave me 30 days to get a new loan or they would foreclose.  

The due-on-sale clause in almost every mortgage is the problem.  The minute the mortgagee learns of the sale they will come after you.  You can avoid that if the property does not transfer via a quit claim but that's a risk as well.  People play games with this signing leases with an intent to buy etc.  Too messy for my clients so I avoid them.

I just wrote an article on my blog about this as I think for the near future it's a great way for a seller to earn some good returns with little risk.    https://retirecoast.com/seller...