Seller financing is a loan provided by the seller of a

property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, r ...

or business to the purchaser. When used in the context of residential real estate, it is also called "bond-for-title" or "owner financing." Usually, the purchaser will make some sort of

down payment Down payment (also called a deposit in British English), is an initial up-front partial payment for the purchase of expensive items/services such as a car or a house. It is usually paid in cash or equivalent at the time of finalizing the transactio ...

to the seller, and then make installment payments (usually on a monthly basis) over a specified time, at an agreed-upon

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...

, until the loan is fully repaid. In layman's terms, this is when the seller in a

transaction Transaction or transactional may refer to: Commerce * Financial transaction, an agreement, communication, or movement carried out between a buyer and a seller to exchange an asset for payment *Debits and credits in a Double-entry bookkeeping sys ...

offers the buyer a loan rather than the buyer obtaining one from a

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Becau ...

. To a seller, this is an investment in which the return is guaranteed only by the buyer's credit-worthiness or ability and motivation to pay the

mortgage A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pu ...

. For a buyer it is often beneficial, because he/she may not be able to obtain a loan from a bank. In general, the loan is secured by the property being sold. In the event that the buyer defaults, the property is repossessed or foreclosed on exactly as it would be by a bank. There are no universal requirements mandated for seller financing. In order to protect both the buyer's and seller's interests, a legally binding

purchase agreement A bill of sale is a document that transfers ownership of goods from one person to another. It is used in situations where the former owner transfers possession of the goods to a new owner. Bills of sale may be used in a wide variety of transaction ...

should be drawn up with the assistance of an

attorney Attorney may refer to: * Lawyer ** Attorney at law, in some jurisdictions * Attorney, one who has power of attorney * ''The Attorney'', a 2013 South Korean film See also * Attorney general, the principal legal officer of (or advisor to) a gove ...

and then signed by both parties.

Secondary market

There is a

secondary market The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of the ...

for seller financed

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The d ...

instruments. Many companies and investors look to purchase properly structured debt instruments as investments.

Seller financing in housing

In the United States, seller financing has emerged as a way for people with poor

credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a de ...

a path toward home ownership following stricter regulations placed on mortgage lending following the subprime crisis of 2008. Unlike a regular mortgage, in which the buyer gets the legal title to the house, the buyer in seller financing does not receive the legal title until they have fully paid off the purchase price of the house. This means that if a buyer misses a payment, they can be evicted and lose all money and interest put into the house. In addition, the buyer is often responsible for repairs, taxes and insurance, meaning that they have the responsibilities of being a homeowner without the rights of actually owning the property. Seller financing contracts are subject to fewer consumer protections than mortgage loans in most states. While seller financing can provide a unique way for people with low credit scores to obtain a path to home ownership, they are considered predatory by groups such as the

Center for American Progress The Center for American Progress (CAP) is a public policy research and advocacy organization which presents a liberal viewpoint on economic and social issues. It has its headquarters in Washington, D.C. The president and chief executive of ...

. In addition, some investment firms have shied away from getting involved with seller financing out of fear for their reputations. A 2012 study of seller financing contracts in

Maverick County, Texas Maverick County is a county located in the U.S. state of Texas. As of the 2020 census, its population was 57,887. Its county seat is Eagle Pass. The county was created in 1856 and organized in 1871. It is named for Samuel Maverick, catt ...

found that less than 20% of people who signed such a contract ever came to fully own the home.

Benefits

Seller/buyer benefits: * Both the buyer and the seller can make substantial savings in

closing costs Closing costs are fees paid at the '' closing'' of a real estate transaction. This point in time called the ''closing'' is when the title to the property is conveyed (transferred) to the buyer. Closing costs are incurred by either the buyer or th ...

. * They can

negotiate Negotiation is a dialogue between two or more people or parties to reach the desired outcome regarding one or more issues of conflict. It is an interaction between entities who aspire to agree on matters of mutual interest. The agreement c ...

interest rate, repayment schedule, and other conditions of the loan. * The buyer can request special conditions for the purchase, such as inclusion of

household appliance A home appliance, also referred to as a domestic appliance, an electric appliance or a household appliance, is a machine which assists in household functions such as cooking, cleaning and food preservation. Appliances are divided into three ...

s. * The borrower does not have to qualify with a loan underwriter. * There are no PMI insurance premiums unless negotiated. * The seller can receive a higher yield on his/her investment by receiving equity with interest. * The seller could negotiate a higher interest rate. * The seller could negotiate a higher selling price. * The property could be sold "as is" so there will be no need for repairs. * The seller could choose which security documents (mortgage, deed of trust,

land sales Rural land sales in real estate refers to the sale of undeveloped land, usually as a parcel or tract of several acres (in the U.S.) of a ranch. Definitions The term ''rural'' can be defined as "the comprehensive, nonspecific word referring t ...

document, etc.) to best secure his/her interest until the loan is paid. * If the property sells for a substantial profit, the seller can spread the resulting

capital gain Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares ...

over multiple years, usually reducing the overall tax burden by turning the transaction into an

installment sale In United States income tax law, an installment sale is generally a "disposition of property where at least 1 loan payment is to be received after the close of the taxable year in which the disposition occurs." The term "installment sale" does n ...

Drawbacks

* The buyer could pay the loan in full but still not receive title due to other encumbrances not divulged by, or unknown to the seller. * The buyer could make payments faithfully, but the seller might not make payments on any senior financing that may be in place, thus subjecting the property to foreclosure. * The buyer might not have the protection of a home inspection, mortgage insurance, or an

appraisal Appraisal may refer to: Decision-making * Appraisal (decision analysis), a decision method * Archival appraisal, process for determining which records need to be kept, and for how long * Project appraisal, comparing options to deliver an objectiv ...

to ensure that he/she is not paying too much for the property. * The seller might not get the buyer’s full

or employment picture, which could make foreclosure more likely. * Depending upon the security instrument that was used, foreclosure could take up to a year. * The seller could agree to a small

from the buyer to assist in the sale, only to have the buyer abandon the property because of the minimal investment that was at stake.

References

{{DEFAULTSORT:Seller Financing Credit Mortgage Real estate terminology