Seller Financing
Also known as a purchase money mortgage, seller financing is when the seller agrees to “lend” money to the buyer to purchase and close on the seller’s home. “Usually sellers do this when money is tight, interest rates are high or when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price,” explains Bohlen.
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Seller financing differs from a traditional loan because the seller does not actually give the buyer cash to complete the purchase, as does the lender. Instead, Bohlen notes, it involves issuing a credit against the purchase price of the home. The buyer executes a promissory note or trust deed in the seller's favor.
The seller may take back a second note or finance the entire purchase if he owns the home free and clear, and the buyer makes a sizeable down payment and agrees to pay the seller directly every month.
The interest rate on a purchase money note is negotiable, as are the other terms in a seller-financed transaction, and is generally influenced by current Treasury bill and certificate of deposit rates. The rate may be higher than those on conventional loans, and the length of the loan shorter, anywhere from five to 15 years.
Lease options
“A lease option is an agreement between a renter and a landlord in which the renter signs a lease with an option to purchase the property,” says Bohlen. The catch? The option only binds the seller; the tenant has a choice to make a purchase or not.
“Lease options are common among buyers who would like to own a home but do not have enough money for the down payment and closing costs,” explains Bohlen. A lease option may also be attractive to tenants who are working to improve bad credit before approaching a lender for a home loan.
Under this arrangement, the landlord agrees to give a renter an exclusive option to purchase the property. According to Bohlen, the option price is usually, but not always, determined at the outset, and the agreement states when the purchase should take place.
A portion of the rent is used to make the future down payment. Most lenders will accept the down payment if the rental payments exceed the market rent and a valid lease-purchase agreement is in effect.
“Before you opt to do a lease option, find out as much as possible about how they work,” cautions Bohlen. And as always, have an attorney review any paperwork before you and the tenant sign on the dotted line.
For more information on buying a home, please contact Judy Bohlen at judy@judybohlen.com, (619) 985-9194, or JudyBohlen.com
For more information on real estate, please contact CENTURY 21 Award at info@century21award.com, (800) 293-1657, or CENTURY 21 Award.
