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Is A Seller-Financed Mortgage Right For You?

by MLB Real Estate Group 06/21/2020

Photo by Charles Thompson via Pixabay

A vast majority of homebuying  transactions rely on the buyer qualifying for a mortgage through a bank. After all, most people don't have enough cash lying around to buy a home outright. Nowadays, you have more options with different types of lenders and alternative financing companies where you can seek pre-approval online. But sometimes even these options don't work out, as pre-approval doesn't mean you're actually going to get the underwriter at the lender to approve you.

This could make you consider other alternative options like seller-financed mortgages.

What is a Seller-Financed Mortgage and How Does It Work?

As the name implies, you are financing your purchase with the person or company selling the home instead of taking out a mortgage with a lender. It's a private transaction where you, the buyer, make an arrangement with the seller to buy the property.

The seller draws up a promissory note that details the terms of the mortgage: interest rate, payment schedule, and the consequences if you default on the mortgage. In most cases, the seller then finances the sale for a short term, usually five years, with a balloon payment at the end of the period. However, the promissory note can be sold at any time to another financing company: sellers don't necessarily need to wait for the buyer to refinance with a more traditional lender.

Why Would I Consider a Seller-Financed Mortgage?

There are situations that make it difficult to work with a traditional lender, such as:

  • Self-employment / entrepreneurship
  • Foreign employment
  • Frequent job changes, or you haven't held the same job long enough
  • Poor or no credit
  • Tax-related issues
  • Debt-income ratio is too high

Sometimes, these situations can be incredibly frustrating when you know you'd be able to afford the mortgage payment or it's even far less than market rent where you want to buy! Alternative lenders may have options but sometimes even they don't want to lend to the self-employed or borrowers with high student loan or credit card debt.

This makes seller financing a more viable option when you can demonstrate your ability to make payments but are having trouble with the traditional channels.

What are the Key Pros and Cons of Seller-Financed Mortgages?

The down payment, interest rate, and other terms are more flexible although they may not necessarily be better than what you would get with a bank. There are also no points, PMI, or origination fees which can save money upfront and over the life of the loan.

Closing is also much faster, easier, and cheaper because there's no loan officer or underwriter involved. 

However, the seller may not always confirm they're able to finance the sale. If the seller has a mortgage, most of them have a due on sale clause that forbids them from selling the home without paying off their mortgage balance first. If the seller still does this without paying off the mortgage first, your new home could get foreclosed on.

The homebuying process can be a difficult undertaking, but we're here to help you find the best options so you can buy your dream home as quickly as possible. Reach out today to learn more!

About the Author
Author

MLB Real Estate Group

Mary Lou Buckley

A full-time Realtor © for 25 years, MaryLou has transacted business from raw land sales to luxury homes in both New Hampshire and Massachusetts. She prides herself in having a diversified background, and great local knowledge of the southern New Hampshire and northeast Massachusetts markets. A prior product manager in the electronics industry, MaryLou takes pride in her marketing knowledge and skills.  

Her hard work and dedication to each client has resulted in quality relationships with buyers and sellers as well as consistent leadership awards. Her commitment to the industry in general has been demonstrated by her service on the Granite State South Board of Realtors Board of directors, the Granite State South Board of Realtors Ethics Committee, as well as membership in the New Hampshire Association of Realtors, Massachusetts Association of Realtors, Northern New England Real Estate Network (NH Multiple Listing) and Massachusetts Property Information Network (MA Multiple Listing).

She is a consistent multi-million dollar producer who credits her success with the repeat referral business from her past and present clients. They have helped her become a highly respected and recognized Realtor © within the community.

A resident of southern New Hampshire for 27 years, MaryLou lives in Atkinson with her husband, Michael.

Amy Wholley

New to the industry and eager to help you with your needs, Amy Wholley is a licensed Realtor © in New Hampshire and Massachusetts. With a passion for service in the southern NH area, Amy is ready to help with your home buying and selling needs. As a proud member of the Coco, Early & Associates family and an active member of the Realtor © association, Amy carries the values of hard work, integrity, and outstanding client service into everything she does.

When Amy is not making home ownership dreams come true for her clients, she enjoys spending time with her young family and going to the beach to soak up the sunshine. Originally from southern Maine, Amy now lives in Pelham, NH with husband, Mark and two sons, Liam and Finn.