Seller financing is defined as a loan provided by the seller of a home to the purchaser. It could be for a portion of the sale amount, or for the entire purchase less a downpayment. The buyer would then make monthly installment payments over a specified time until the loan is fully repaid at an agreed-upon interest rate.
A seller take-back is just like a loan from any lender. It must be repaid according to the terms and conditions outlined in the note. If not repaid, the property can be foreclosed upon, just like with a bank.
Have an attorney prepare and review the take-back/seller financing loan papers before signing anything. If you are a seller, insist on seeing a buyer’s credit report and past tax information — just like any lender. And be sure that any loan arrangement is written according to terms which are satisfactory to your attorney.
There are benefits and drawbacks to both parties.
BUYER BENEFITS:
It may be the only way that you can purchase a home at this time.
Both the buyer and the seller can quite possibly save a lot of money in closing costs. The seller conveyance tax on property is going up as of July 1, 2011. It might help your case!
You can negotiate an interest rate, repayment schedule, and other conditions of the loan, not like with a bank
You , as the borrower would not have to pay PMI insurance unless required by the seller, and as a bonus, you do not have to go through a bank's loan underwriting department, who usually places conditions of the loan with your approval, if you can get one. .
BUYER DRAWBACKS:
You could pay the loan back in full but still not receive clear title due to encumbrances, items not divulged by or unknown to the seller, or the seller disappears. He would have to file a release of lien for you to be able to sell the home when you want to.
You may not have had the privilege or right to obtain the protection of a home inspection, mortgage insurance, or an bank appraisal to ensure that you are not paying too much for the property. Make sure this is part of your agreement.
Make sure that you hold title to the property with a seller note. If you don't and he defaults on his current loan, or has encumbrances on the property that you are not aware of, YOU will be kicked out, and your money lost if he goes into foreclosure.
SELLER BENEFITS:
The seller can receive a higher yield on his/her investment by receiving equity with interest, if negotiated that way.
The seller could negotiate a higher selling price as well as higher interest rate.
The property could be sold "as is" so there will be no need for repairs.
The seller could choose which security documents (mortgage, deed of trust, land sales document, etc.) to best secure his/her interest until the loan is paid.
SELLER DRAWBACKS:
The seller might not get the buyer’s full credit or employment picture, which could make foreclosure more likely.
Depending upon whatever security instrument that was used, foreclosure could take up to a year or longer, if unfortunately needed.
The seller could agree to a small down payment from the buyer to try and help out the buyer and to make the sale, only to have the buyer abandon the property because of the small investment that was at stake.
Seller-financed sales can be good, as long as it is a win-win situation for all parties- good for both seller and buyer. NEVER attempt to enter into a transaction like this without the assistance and guidance of your attorney.
GREAT COMMENT BELOW BY JENNIFER BUCHANAN- PLEASE READ