Seller financing can save you money since there are no closing costs such as a loan origination fee or discount points, notes Bankrate. Normally, with seller financing, buyers agree to a balloon payment after a specified number of years, at which time they refinance the mortgage loan with a traditional lender. Although owner-financed homes are typically amortized over the standard 25 to 30 years, the balance of the balloon mortgage often comes due after five years.
Hire a title company to research whether the seller owns the property free and clear. If there is still a mortgage on the home, there is a chance the seller’s lender will enforce the due-on-sale clause. Consequently, the seller can’t sell you the house without first paying off his mortgage. A title search also makes certain that the seller owes no unpaid utilities, tax liens, judgments or other liens on the property. Before choosing a title company, check the company’s reputation with the Better Business Bureau, suggests Zillow.
Discuss with the seller the type of mortgage you need. With an all-inclusive mortgage, you give the seller a down payment and the seller carries a promissory note for the balance of the purchase price you negotiate. In some cases, a conventional lender may finance up to 80 percent of the home’s market value. The seller then agrees to carry a second mortgage lending you the difference.
Provide the seller with a credit application listing credit references and the contact information for your employer. The seller may also run a credit check. Like a traditional lender, the seller will need proof of your income and to verify your employment.
Compare the current mortgage interest rates conventional lenders are offering. Knowledge about interest rates can help you negotiate a better rate with the seller. Rather than going by national rates, use the rates different lenders in your area are offering.
Sign a written sales contract. Include details relating to the conditions and terms of sale. Indicate the amount the seller is financing, the interest rate you will pay and the loan term and length of the amortization period. Make the contract contingent upon the seller approving your finances and the property appraising for at least the amount you need to borrow, suggests Realtor.com.
Hire an appraiser who is state licensed or certified. Since you will be putting up the home as collateral, an appraiser will assess the home’s value to make sure the property is worth as much as or more than the purchase price and the amount the seller is financing.
Give the seller a down payment. Nolo recommends putting down at least 10 percent of the home’s purchase price. Some sellers may want the standard 20 percent, but as long as you and the seller agree on the down payment, it can be any amount.
Get an attorney to write up the sales contract and advise you on other legal documents you will need to complete the sale.
A licensed appraiser must pass a state exam but certification requires additional classroom education and more hours of experience working as an appraiser.
With a due-on-sale clause, the lender has the right to call in full repayment of the seller’s loan immediately upon transfer of ownership or initiate foreclosure.
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