Seller Resources - Articles
Selling Your Home - Seller Financing
What is seller financing?
Seller financing is when a seller helps to finance a real estate transaction by taking back a second note, or even financing the entire purchase if the seller owns the home free and clear. Usually sellers do this when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price. Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller's favor. These special circumstances must be acceptable to the lender who makes the first mortgage on the property. The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and seller.
If you are a seller considering such an arrangement, it is critical to thoroughly evaluate the creditworthiness of the buyer first. Fear of default makes many sellers reluctant to take back a second note. But seller financing can bring a higher price as well as complete the sale sooner in some situations. For more information, contact the Internal Revenue Service for a copy of its Publication 537, "Installment Sales." Order by calling (800) TAX-FORM.
How are the rates set for seller financing?
The interest rate on an owner-carried loan is negotiable. Whereas real estate agents in Oregon used to be able to negotiate for their sellers and buyers the interest rate and terms of a seller carried sale in the past, new laws both at the Federal level and state levels are in effect (2014) that prevent your Real Estate Agent from assisting you in the negotiation of this kind of financing at this point in time unless he/she is licensed as a loan originator.**This is a unknown territory and untested for most agents who have previously offered counsel or negotiated for their clients in this seller financing area. Most Real Estate Agents are not licensed Loan Officers. So if you are looking at seller financing in Oregon, you will need to consult a lender of your choice or a person who is licensed to make loans. Seller financing used to typically costs less than conventional financing because sellers don't charge loan fees (points), but with the law changes, this presents sellers and buyers with higher costs. Interest rates on an owner-carried loan will also be influenced by current Treasury bill and certificate of deposit rates. Sellers usually aren't willing to carry a loan for a lower return than they would earn if their money was invested elsewhere.
(** The Oregon Association of Realtor's has this Law change on the books for our Lobbyist to work on to reverse this coming session in congress. It has a negative impact on sales in the State of Oregon not only in major populated areas for small investors but also in the rural communities where seller carry backs on large parcel sales are a common way of selling land and farm property.)
What are the benefits of seller financing?
Seller financing offers tax breaks for sellers and alternative financing for buyers who can't qualify for conventional loans. If you are a seller, the risks you face are the same as those facing any lender: Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans made against it? You should run a full credit check on the borrower, require hazard insurance on the property, and include a due-on-sale clause. There also are financing, disclosure, and repayment-term requirements that need to be met. It is wise to consult a lawyer when putting together this kind of transaction.