Seller financing is an excellent option for some property buyers and sellers. However, no matter the type of financing the seller offers, they are taking on a sizable amount of risk. Underwriting and supplementing a mortgage means dealing with the consequences if the buyer defaults on the loan. This is one reason many sellers hesitate to offer financing. However, there are some ways sellers can reduce the amount of risk involved and still make the sale.
Sellers Can Require a Loan Application
One way to mitigate risk in seller financing is to require the buyer to fill out a detailed loan application. This will give the seller all the information they need to determine whether to offer financing. Just like any application to another lender, the loan application should include a credit check, employment and personal references, financial information and anything else to help the seller get a full picture of the buyer’s situation.
Sellers Can Require Approval of Finances
Either in addition to or instead of requiring an application, sellers can make the sales contract contingent on the buyer having a satisfactory financial profile. The sales contract should include all the other aspects of the deal like loan amount, interest rates and length of term. By adding the additional financial approval requirement, sellers can avoid agreeing with a high-risk buyer.
Sellers Can Have the Loan Secured
Another way sellers can reduce their risk is by getting the loan secured to the home or property. This means that if the buyer defaults on the loan that the seller can foreclose on the property. To secure the loan this way, the seller should have an appraisal done to make sure the value is equal to or greater than the purchase price.
Sellers Can Require a Down Payment
Other financial institutions require down payments on loans, and sellers can as well. Not only do down payments give the lender or seller a safety net against risk, it gives the buyer an opportunity to commit to the purchase financially. A buyer who has put down a large down payment is far less likely to walk away from the deal. Just like other lenders, sellers should ask for at least 10% of the purchase price as a down payment.
Sellers Can Hire a Loan Servicing Company
If a seller needs help to handle all the paperwork involved in offering financing, they can hire professionals to help. A loan servicing company can assist with drawing up the mortgage, generating statements, communicating with the buyers, collecting payments and other administrative tasks. Besides helping to lighten the load, this further protects the seller from risk by having another party involved to check for errors.
Seller financing is uncommon because of the amount of risk. However, by using these strategies, sellers can protect themselves and benefit all sides of the home sale process.
About the Author
Kyung Kim
Hi, I'm Kyung Kim. I immigrated from South Korea to the United States in 1968 when I was 7 years old. I have seen my mom struggle with the English language and work hard to raise her four kids by herself. Still to this day, I don't know how she pulled it off, but she bought her first home in 1979 for $70,000 and because of that decision, she was able to live without worrying about her financial future. I want that for everyone, to feel the pride of home ownership and to build their financial wealth using real estate as part of their financial portfolio. I feel so blessed to play a small role in helping others reach this goal.
I live in Beaverton with my husband, Richard. My mom, who lived with us for several years, passed away in our home in February 2022. Her first home purchase in 1979 made it possible for her to live to the very end, without worrying about her finances. As of August 2022 with a little downpayment assistance, our four children own their own homes. Being in real estate, I quickly realized that if they didn't buy now, they may be priced out of the market in the future. Whether that would have been the case, we will never know, but what we do know is that they are all realizing some good, healthy appreciation in their home values.
As passionate as I am about people owning their homes, I'm also passionate about giving back to our community. I support Compassion First, a non-profit organization that provides aftercare for sex trafficked girls in Indonesia. My husband and I also feel called to financially support social injustice organizations.
I'd love to assist you. Whether you're in the research phase at the beginning of your real estate search or you know exactly what you're looking for, you'll benefit from having a real estate professional by your side. I'd be honored to put my real estate experience to work for you.
