Seeking advice on Seller finance terms

[Victoria E.]

Hello, I am seeking advice as I am  new to seller financing.  I want to understand how to structure the finance terms.

if for example the house is on the market  for $200K

1. how much do i ask for down payment

2 going interest rate? should it be interest only

3. what fees should i charge

4. if i am using a loan servicing company how do i factor in the fees?

5. are there closing costs i need to have in mind

6. anything else I should add to the terms

I welcome the community's wisdom and insights.

[Ty Coutts]

Hi, Victoria E., it’s common to ask for a down payment of 10-20% of the sale price. 

1. In your case: For a $200K house, a 10% down payment would be $20,000, and a 20% down payment would be $40,000.

2. Check current mortgage rates as a reference. As of now, mortgage rates vary but are generally around 6-7% for a 30-year fixed-rate loan. Rates for seller financing are typically higher than conventional mortgage rates to compensate for the increased risk. A good range might be 7-9%.

3. As for fees, you should consider origination, processing and late payment fees. 

4. Loan servicing companies charge for managing the loan, collecting payments, and handling escrow. Fees can range from $15 to $50 per month, or a small percentage of each payment. You can pass these fees on to the buyer, include them in the monthly payment, or pay them yourself. If the fees are passed to the buyer, ensure this is clearly stated in the terms.

5. The closing costs to consider are the recording, legal, title search, insurance, appraisal, and escrow fees.

6. Some terms you may find helpful:

Repayment Schedule: Clearly outline the payment schedule (monthly, quarterly, etc.).
Balloon Payment: If applicable, specify the amount and due date of any balloon payment.
Prepayment Penalty: State if there’s a penalty for paying off the loan early.
Default Terms: Clearly define what constitutes a default and the consequences, such as foreclosure procedures.
Insurance Requirements: Ensure the buyer maintains property insurance.
Maintenance Responsibilities: Clarify that the buyer is responsible for property maintenance and repairs.

I hope this helps you out, have a great day!

[Victoria E.]

Ty thank you for this.  Superhelpful

[Noah Corwick]

Quote from @Ty Coutts:

Hi, Victoria E., it’s common to ask for a down payment of 10-20% of the sale price. 

1. In your case: For a $200K house, a 10% down payment would be $20,000, and a 20% down payment would be $40,000.

2. Check current mortgage rates as a reference. As of now, mortgage rates vary but are generally around 6-7% for a 30-year fixed-rate loan. Rates for seller financing are typically higher than conventional mortgage rates to compensate for the increased risk. A good range might be 7-9%.

3. As for fees, you should consider origination, processing and late payment fees. 

4. Loan servicing companies charge for managing the loan, collecting payments, and handling escrow. Fees can range from $15 to $50 per month, or a small percentage of each payment. You can pass these fees on to the buyer, include them in the monthly payment, or pay them yourself. If the fees are passed to the buyer, ensure this is clearly stated in the terms.

5. The closing costs to consider are the recording, legal, title search, insurance, appraisal, and escrow fees.

6. Some terms you may find helpful:

Repayment Schedule: Clearly outline the payment schedule (monthly, quarterly, etc.).
Balloon Payment: If applicable, specify the amount and due date of any balloon payment.
Prepayment Penalty: State if there’s a penalty for paying off the loan early.
Default Terms: Clearly define what constitutes a default and the consequences, such as foreclosure procedures.
Insurance Requirements: Ensure the buyer maintains property insurance.
Maintenance Responsibilities: Clarify that the buyer is responsible for property maintenance and repairs.

I hope this helps you out, have a great day!

This is a fantastic breakdown by Ty. 

The only thing that I'd add to this is to have the loan amortization schedule clearly defined as well. Basically if the payment amounts would be calculated like they are being paid over a 30/15/10, etc. year term. 

Best of luck! 

[Victoria E.]

Quote from @Ty Coutts:

Hi, Victoria E., it’s common to ask for a down payment of 10-20% of the sale price. 

1. In your case: For a $200K house, a 10% down payment would be $20,000, and a 20% down payment would be $40,000.

2. Check current mortgage rates as a reference. As of now, mortgage rates vary but are generally around 6-7% for a 30-year fixed-rate loan. Rates for seller financing are typically higher than conventional mortgage rates to compensate for the increased risk. A good range might be 7-9%.

3. As for fees, you should consider origination, processing and late payment fees. 

4. Loan servicing companies charge for managing the loan, collecting payments, and handling escrow. Fees can range from $15 to $50 per month, or a small percentage of each payment. You can pass these fees on to the buyer, include them in the monthly payment, or pay them yourself. If the fees are passed to the buyer, ensure this is clearly stated in the terms.

5. The closing costs to consider are the recording, legal, title search, insurance, appraisal, and escrow fees.

6. Some terms you may find helpful:

Repayment Schedule: Clearly outline the payment schedule (monthly, quarterly, etc.).
Balloon Payment: If applicable, specify the amount and due date of any balloon payment.
Prepayment Penalty: State if there’s a penalty for paying off the loan early.
Default Terms: Clearly define what constitutes a default and the consequences, such as foreclosure procedures.
Insurance Requirements: Ensure the buyer maintains property insurance.
Maintenance Responsibilities: Clarify that the buyer is responsible for property maintenance and repairs.

I hope this helps you out, have a great day!

 Would you run a credit report on the buyer?

[Ty Coutts]

Hi Victoria,

Yes, running a credit report on the buyer is highly recommended. This helps you assess the buyer's creditworthiness and ability to make timely payments. There are definitely some key points to consider with this though such as Income Verification, References, Terms and Conditions that I would recommend having. Please feel free to reach out to me directly if you would like to discuss or need further assistance!

[Aaron T.]

Victora, thanks for posting this. I am also looking at owner financing one of my properties and had the same questions. 

Additionally, are there companies that specialize in doing this or helping the owners through the process? also books on this topic? 

I would like to learn more before I pull the trigger in the next 6 months. 

[Victoria E.]

Thank you for this thoughtful details.  I was getting counter offer rates for 3.0% from different investors.  I eventually found a traditional buyer who got their own mortgage. I will certainly keep all these nuggets for future transactions.