Seller financing for today's market

Negotiable terms give repeat buyers a lifeline

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jul. 26, 2010

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Negotiable terms give repeat buyers a lifeline

Dian Hymer
Inman News

During the recession in 2001, a strong home-sale market was instrumental in pulling the economy back on track. The opposite may be the case now. The economy, particularly employment, needs to improve before the housing market stabilizes.

Low interest rates are helping the home-sale market today, but the housing market is far from stalwart. Unemployment is high; mortgage qualification is difficult; and most buyers can't afford to buy a new one without selling their existing home first, creating a logjam in the repeat homebuyer segment of the market.

Interim or bridge financing that buyers used routinely in the past to buy a new home before selling their current home is virtually nonexistent in today's market. An interim loan is a loan secured on your current home to generate cash for a downpayment on a new home.

Homeowners who have a home equity line of credit (HELOC) secured against their property can tap unused funds to convert equity to cash in order to buy a new home before selling first.

HOUSE HUNTING TIP: Seller financing could be the answer for some homebuyers. One possibility would be to ask the sellers of the home you want to buy to carry financing until you sell your home.

If the sellers have no mortgage secured against the property -- i.e., they own it free and clear -- they might be willing to carry a first mortgage. Compared to other investment options, 5 percent or so from a buyer with good credit and a decent downpayment could be attractive if the seller doesn't have an immediate need for the proceeds from the sale.

As with all terms of a purchase agreement, the terms of seller financing are negotiable -- everything from the interest rate, when the loan is due, how and when payments are made, the amount of the late fee, etc.

Interest on the mortgage can accrue and be due when the loan is paid off. Or payments can be amortized and paid monthly. Particularly with a first mortgage, sellers will probably want to receive periodic payments. However, it lowers the buyers' carrying costs while they own two homes if the seller will defer payments until the note is paid off.

A more common scenario than a seller-carry first mortgage would be to find sellers of a home you'd like to buy who have enough equity to carry a second mortgage secured either against your current home or on the home you are buying from them.

This wouldn't work if the sellers have already committed their proceeds from the sale, like to the purchase of another home.

If the sellers carry a second mortgage on your home, it should not require approval of your first mortgage lender. However, you would need to be able to qualify for a first mortgage on the new home. In order to be approved for that loan, your overall debt-to-income ratio will be scrutinized by the lender's underwriters.

The underwriters will factor in the cost of the seller-carry financing into your overall debt. Most lenders will also want the term or due date of the seller's loan to be not less than five years from closing. Check with your mortgage broker or lender before making an offer that will include seller financing to find out what the first lender on the new home will require.

The sellers will want their loan paid off when your current home sells. The first mortgage lender might allow a seller-carry second mortgage with a due date in five years or when your home sells, whichever occurs first.

THE CLOSING: The lender wants to make sure the buyers aren't faced with a large balloon payment due months after closing.

Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide."

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