Seller - Owner Financing is a BROAD term.
If a Seller helps a buyer buy a property, is that seller financing?
Here is a discussion of what a seller can do to help a buyer buy:
What Sellers Can Do
When real estate is soft, the buyer typically has the upper hand.
Sellers are in a unique situation because the main asset in the transaction belongs to them. Nothing happens unless the seller decides to move their property. They own the equity in the property as well as the home itself.
Sometimes the asset can also be a liability; sellers can help themselves by assisting buyers facing income, asset, or credit barriers; sellers may fund different types of buydowns to lower rates, provide down payment assistance, or carry all or part of a newly created mortgage note; sellers who are trying to move a property in a slower market make the mistake of simply slashing their asking price; dont give away their equity in a "fire sale," implement techniques described here and get your property sold at a fair price.
1. Seller Contributions
NOT "seller concessions", seller contributions are really a range of incentives or other financial offerings designed to make the deal more attractive and doable for a buyer.
a. Closing cost credit
b. non- recurring" buyer costs (escrow fees, title insurance, discount loan points, or loan origination charges).
c. "recurring" costs (insurance payments, mortgage interest and property taxes for example) are normally out of bounds.
d. "repair allowance", viewed as a seller contribution toward the cost of future repairs to be made by the buyer, unacceptable to lenders; may not give cash at closing; lenders look at any contract references to "needed repairs" which could affect the value of the property.
2. Seller-Funded Permanent Buydowns
pay to lower the buyer's mortgage interest rate. The value to the buyer can add up to a very sizeable amount of money; typically pays the up-front lender fee to lower the interest rate, which results in accumulating paid interest savings for the buyer as long as the buyer owns the property, or for the life of the loan; may add up to many tens of thousands of dollars; make sure you check the fine print of the lender's loan lock provisions; be sure your seller's money is truly paying down the loan rate as opposed to paying other lender charges to the buyer.
3. Seller-Funded Temporary Buydowns
Buydowns can also be structured to adjust the buyer-paid interest rate for a limited number of years; can cover the first two, three or four years or more of the buyer's loan; allows your seller to reduce the buyer's ongoing loan cost (monthly payment) considerably.
4. Owner Financing
A willing seller may be able to keep their selling price intact by offering financing to a buyer; for a seller who needs to sell as soon as possible for the best possible price; expands the potential market for buyers to those who might not qualify with a lender for any number of reasons relating to their credit, verifiable income, or other issues; seller creates an 'investment" that can produce an annuity with a very good rate of return for many years; seller needs to become very well educated on how to qualify a potential buyer (how to get credit, income, debt ratio, and other accurate personal historical data on the buyer-and how to verify that data); seller needs legal advice to review contract documents, as well as title and escrow services to conduct a title search and closing; buyers attracted to seller financing may have income sources including part- time work, bonus income, royalty income, dividend and interest income from investments, or they may be newly self employed; seller who finances needs to get a substantial down payment and ensure that the property is adequately insured by the buyer and that initial property taxes are pre-paid and a tax payment plan is established; if the buyer stops paying, the seller will have to proceed like a bank or other lender and foreclose on the buyer.
5. Contract for Deed
A contract for deed agreement to purchase is similar to a seller-financed purchase. The major difference is that the deed to the property is not conveyed until the purchase price is paid in full; property being transferred in this arrangement must be owned free and clear by the seller; for selling properties that may be difficult to compare due to unique construction, number of bedrooms, etc; terms are at the discretion of buyer and seller. Contract for deed is often used to allow the buyer to move in while they are preparing to qualify for a conventional loan (to pay off the contract for deed terms); The seller is provided with immediate income; buyers, this can be a way to move into a property they intend to own while avoiding renting from the owner; owner can often command a higher monthly payment under these terms than they could in a rental arrangement; contract for deed may be seen as a last resort for a seller who really wants to cash out their equity quickly. may be local legal restrictions on these arrangements, including restrictions on "repossessing" the property; seller should definitely consult an attorney. Ownership does NOT transfer at signing, so it should be easier (than in foreclosure) to take back the property if the buyer stops paying. Depends on the State Regulations.
6. Seller Seconds
This is a mortgage issued by the seller to the buyer that is placed in a subordinate or second position to an existing first mortgage from a conventional lender; seller second can be a great incentive to buyers; can help them purchase by putting down less cash-leveraging their assets; second mortgages typically carry a higher interest rate than first mortgages, an advantage for the seller over other investment options; a seller second can open new opportunities for buyers in markets where conventional lenders are tightening their loan to value guidelines and buyers need a way to close the resulting financing gap; lenders who want to limit their exposure may agree to a "Combined Loan to Value" guideline that supports a seller second; seller seconds may help buyers reduce their conventional loan needs below the PMI (private mortgage insurance) level, saving significant dollars per month; seller seconds can also help in larger purchases, reducing the amount buyers would need to borrow conventionally, bringing their remaining loan requirement within reduced rate "jumbo" loan territory; some conventional loans prohibit secondary financing; second loans not disclosed to conventional lenders are illegal.sellers granting a second loan must file a lien on the property.
7. Lease with Option and Lease Purchase
A lease with option to purchase is an agreement that the leasing party can buy (or not buy) the property at lease end for an agreed price; a lease purchase agreement, the leasing party commits to purchasing the property immediately at lease end; the owner agrees to apply a portion of the monthly rent payment toward either the buyer's down payment or closing costs at time of purchase. Understand Dodd Frank when applying credits and lease options; Lease purchase agreements can be a way for sellers to find a buyer, acquiring both a buyer commitment for the future as well as rental income now, to defray monthly obligations; A seller's offer of lease purchase can also attract a buyer who wants the property but needs a little additional time to complete loan qualification and does not want to or cannot make an immediate down payment; terms of payment in a lease purchase should conform to local rental data for comparable homes; the amount paid monthly to be set aside for down payment of closing costs should be in excess of the going rental rate; if not, the lender arranging the mortgage at lease end may not accept the set aside funds; instead, the lender will disqualify the funds by declaring them a "gift" from the seller to the buyer; lease purchase documents should be drawn up with legal counsel to address eventualities such as the buyer not qualifying to purchase at lease end or a market value decline impacting the agreed purchase price and lender's terms.
8. Selling to Relatives - Selling to relatives can be a good option if the seller is having trouble moving the property or if they desire to keep the property in the family; if the property is owned outright, there are few challenges, but if a conventional loan is needed to complete the deal, it can get tricky; creating conditions where a lender is convinced that this is an "arm's length transaction" may be challenging. In other words, conventional lending happens in an environment where each party is acting in their own interest, not the interest of the other; the lender will want to see a sales price based on appraised value; the desire to provide a great price for a family member can get in the way of establishing a loan on appraised value, this is especially true if the purchasing relative has little or no down payment; family members may "gift" equity in a transaction to reduce the amount of mortgage money required, the lender must still be satisfied about appropriate value to protect their loan, gifts have tax consequences and IRS guidelines govern gift amounts.
9. Seller-Assisted Down Payments
Nonprofit groups formed in recent years offer down payment money to certain buyers; the payment is linked to a contribution to the nonprofit by the seller, but the pathway is not hurdle-free, assisted down payments may be barred in certain situations; simple and attractive way to secure a buyer who is otherwise qualified but struggling to find down payment money; nonprofit provision becomes part of the purchase contract; nonprofit receives the contributed amount, plus a processing fee, from the seller and sends the funds directly to closing as a credit to the buyer; the funds do not go directly to the buyer; sellers may be tempted to increase the price of their property to pay for the down payment assist. But this can overvalue the home and block the conventional loan; seller assists of this kind need to conform to seller concession or contribution guidelines set by lenders; the down payment assistance industry is facing legal challenges by the US Department of Housing and Urban Development (HUD); the industry expects fine tuning of these programs will result. See
https://www.hud.gov/states/
10. Wrap Around Mortgages
"wrap" mortgages are loans that are wrapped around the original mortgage on a property; original loan is not satisfied directly at closing-the "wrap" loan is dedicated to paying on the original loan. Also called an AITD or All Inclusive Trust Deed; the buyer is using the "wrap" loan to make payments to the seller, who in turn continues paying on his original loan while deeding the property to the buyer; the original lender must agree to waive the "due on sale" provision in the original loan; can be an alternative when seller financing won't work because of the seller's loan on the property; original lender may grant permission for a "wrap" to be created; the buyer may qualify to assume the original loan; getting permission to "wrap" from lenders is not easy; there is a temptation for buyers and sellers to create undisclosed wrap agreements; lenders may commission ongoing research of title records looking for undisclosed liens; if discovered, the original lender can foreclose on the seller and the buyer would lose everything, including their down payment.
