The Pros & Cons of Seller Financing Your Home

While only a small portion of sellers choose to seller-finance their home, seller financing can be a useful and beneficial tactic for both buyers and sellers. With seller financing, sellers can receive an ample return on their investment and sell their home faster and for top dollar. For buyers, this process provides more flexible requirements and rates, as well as better loan terms. It also helps out buyers who would not qualify for a mortgage loan from a bank.

While seller financing has many benefits, it does not come without risks. But, by understanding the potential problems associated with seller financing, you can reduce your risk. With seller financing, the seller is essentially assuming the role of the bank and receiving monthly payments from the borrower. The buyer signs a promissory note, which is a promise to repay the loan, and a mortgage or deed of trust, which permits the seller to foreclose in the event that the seller neglects to pay. In exchange, the buyer legally holds the title to the home and can choose to sell or refinance, but still has to make the agreed-upon payments to the seller.

Let's take a closer look at the main pros and cons of seller financing for the seller:

Pros

• More interested buyers – Because seller-financed homes can be purchased by people who would not ordinarily qualify for a mortgage loan, the seller can attract a larger pool of interested buyers.
• Quicker sale – Since seller financing attracts more buyers, the home will spend less time on the market than a conventional property.

• Higher sales price & interest rate – Sellers offering owner financing can usually sell the home for the full listing price and receive a higher interest rate than a home being sold through conventional methods.

• Increased cash flow – The seller will receive monthly payments from the buyer, which will increase the seller's spendable income.

Cons

• Risk of foreclosure and abandonment – If the borrower stops making monthly payments, the seller will have to foreclose on the home, which can be a costly process. Also, buyers who pay a small down payment could potentially abandon the property since there was a minimal investment involved.

• Settle an existing mortgage – The seller must pay off his/her exist mortgage before selling financing the property.

To avoid the cons of seller-financing, you can sell your mortgage note to a note buying firm. Loan acquisition companies on the secondary market that specialize in buying mortgage notes will give you top dollar for your note and assume the full risk.