Does Using Seller-Financing Affect Your Debt & Credit Report

Question

I have been looking at single family homes in my market and have noticed that several properties offer seller financing. I am aware that Seller-Financing is a great way to acquire a property but my only concern is that if the loan gets reported to any credit bureaus it will negatively affect your Debt-to-Income Ratio and Credit Score in future loan applications. Can anybody please confirm this?

Andrew Postell · Answer

@Carlos Licon whether or not it reports to you credit does not guarantee that it won't be picked up by a lender.  For some loans it won't matter at all...but some loans will ask about properties that you own personally.  That could lead to them finding a loan that you have signed for personally.  The right method to use here for owner financing deals is to own it in your LLC, and to have the loan in your LLC name as well.  That way, even if a lender does "discover" the property, you aren't personally responsible for it anyway.  Hope that makes sense.

Tom S. · Answer

@Carlos Licon  I have a number of seller finance mortgages and none report to my credit.  However, when applying for another mortgage, you're supposed to fully disclose it, and it will also show on your tax returns (Sch E) if kept as a rental.  Lenders have told me they manually adjust the DTI ratios for this.

Tom S. · Answer

@Andrew Postell  @Carlos Licon  I've never across a loan for a standard SFR or even a small apartment building that doesn't require a personal guarantee (at least for favorable rates and terms).  Also for tax reporting purposes, the LLC is disregarded and it goes on your Sch E.  So as far as I've seen, the loan always shows there for rental properties.

Carlos Licon · Answer

@Tom S. Got it. So it won't affect your credit score but it was to be reported to the lender when applying for another mortgage. However, lenders favorably adjust your debt to income ratio?

Account Closed · Answer

If it would be your first property, and you are actually wanting to improve your credit score - I believe that your score is higher when you have a mortgage as one of the types of credit on your report.  So, if that's what you're wondering, you might want to check into that.  And maybe the seller could report it to the bureaus somehow, if that was something you cared about.

Normally, you would get better financing through a lender than a seller, so seller-financed deals are normally for a property the seller is having a hard time selling, and is willing to take someone with less than perfect credit in order to get the property sold.  Plus, then they can make money by charging you higher interest rates, and if you default, they get the property back to sell again.

I've purchased two properties with seller financing - one was raw land I developed (put in well, road, fencing, septic, etc.) and he was having a hard time selling it and I didn't have great credit or income at the time.  Worked out well for both of us.  Second one was a condo during the crash in the 1990s and again I didn't have great credit and the condo was hard to sell not only because of the market, but because condos are hard to get financed anyway without larger down payments, etc.  Again, that worked out great for both of us. I actually bought the condo with some of the money I made selling the land I developed in WA (condo was in CA).

So, not sure if that was way off topic from what you wanted to know, but there you have it.

Andrew Postell · Answer

@Tom S.  I can't speak for every lender here but there are certainly loans that exist where you do not have to personally guarantee them.  And if a lender is investor friendly, a loan that is written under a LLC should not count towards you at all.  Even if it's listed under your schedule E.  Now some banks might STILL hold it against you.....but I would guide you to not work with banks that underwrite in that fashion. If the lender is asking "what's the mortgage payment so we can calculate the cash flow"....ok, that sounds reasonable.  But if you are not personally responsible, it should not be held against you personally.

Does Using Seller-Financing Affect Your Debt & Credit Report

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