Selling a home can be a difficult process for both sellers and buyers. Sellers often find themselves unable to sell their home in a timely manner while buyers often struggle with being approved for a large enough mortgage to meet their needs.
If you are having trouble meeting lenders’ requirements for a mortgage, you might consider purchasing a seller-financed, also known as owner-financed, house. Seller financing can sometimes be favorable for both parties, particularly in a buyer’s market.
However, in other cases, seller financing is often very risky and should be avoided.
Here’s what you should know about seller financing and whether or not you should by a seller-financed house.
What is Seller Financing?
Seller financing just means that the seller of the property is putting up part of or all of the money required for you to purchase the house. So, instead of having to be approved by a lender, you would be borrowing the money straight from the owner of the property.
In some cases, buyers are able to completely finance the purchase of the home through this method. However, seller financing is often combined with a conventional mortgage to finance the purchase.
The terms would be similar to a standard mortgage. You would have to come to an agreement with the seller regarding interest, rates, loan term, monthly payments, and other factors. More often than not, you will not be given the title to the home until the loan is paid in full.
Risks of Buying a Seller-Financed Home
Buying a seller-financed home is often a bad idea for a number of reasons.
Hard to Find
Seller financing is very, very uncommon. Finding the right house is hard enough, and if your only option is a seller-financed home, your options will be severely limited.
Also, keep in mind that sellers willing to put up financing on their own are often doing so because they are having trouble selling their home. If a home isn’t selling, there are often valid reasons.
If you have to resort to purchasing a seller-financed home, it is likely because you weren’t able to be approved for a mortgage. Whether it’s because you have poor credit, employment history, or other reasons, you were likely declined because lenders determined you weren’t in a good financial position to make such a large purchase.
If this is the case, it might not be time to buy a home. Consider why you were denied for a mortgage, and decide whether or not this is the right time for you to make such a large investment.
Often a Bad Deal
People selling owner-financed homes are often looking to take advantage of first-time home buyers or buyers in poor financial situations.
Property investors understand that they can often sell homes to individuals in these circumstances for more than the market value of the property.
Buyers in poor financial situations may find themselves looking for a seller-financed home to solve their problems. However, purchasing an owner-financed home can be incredibly risky. That’s not to say that it is never a viable solution; however, you should be sure to exercise caution before entering into a seller-financed real estate deal.