Seller financing means the financing for the home comes from the person selling the house. A mortgage note is filled out, and you agree to pay the seller in payments over a set period of time. For a buyer with less than prefect credit, this can be a good option. However, seller financing can be hard to find, as many sellers want all of the money up front.
Unlike buying a home through a realtor and bank the seller doesn’t have industry guide lines and standards that they much adhere to. For example, Realtors must fill out a disclosure statement that is a binding legal document. Banks have a seemingly endless number of legal proceedings that must be completed before a loan can be issued. Sellers who list and finance their homes themselves don’t have any of these guiding principles. In order to buy a home successfully that is Seller Financed there are a few things you need to consider.
1. Have the home inspected by a well established home Inspection Company. Don’t ask your neighbor who is in construction or your Uncle who was a roofer once. By hiring an experience inspector you will get a complete report as to the condition of the house.
2. Have a Title search done by an attorney. This will ensure that the title to the house you are buying is free and clear and that the person selling it can legally sell the house.
3. Have the Mortgage note drawn up by an attorney and have it filed at the courthouse. This will place a lien on the property until the note is paid in full. The title to the property should be put into your name. If the seller is retaining ownership of the property for a certain length of time or until a certain amount of principal has been paid, that is considered a lease to own agreement and should be written as such.
4. Make sure all conditions of the loan are included in the mortgage note.
- Interest rate – not only the percent of interest you are paying, but how that interest in to be compounded and added to the loan.
- Grace period – make sure there is a grace period for your monthly payments.
- Default – at what point does the seller/lender consider the loan to be in default.
And what action will he or she take once the loan is in default.
- Real Estate or Property taxes – when you purchase a home and the title/deed is put into your name. You are financially responsible for the property taxes.
- If there is anything out of the ordinary about the sale or maintenance of the property it needs to be listed on the Mortgage note. In other words get any promises made to you or by you in writing.
- Although it isn’t a pleasant thought, you need to know who will receive ownership of the loan should something happen to the seller/lender.
5. The interest on primary resident home loans is almost always 100% tax deductible on your income taxes. You must file a 1040 with Schedule A (itemized deductions). In order to claim the deduction the Lender has to provide you with a completed 1099 form by the 31st of January each year. IRS Publication 936 can probably answer most of the questions you will have about deducting your mortgage interest. You should visit www.irs.gov for all laws concerning home mortgage interest.
6. There may be laws in your area concerning seller financing. You should contact your local courthouse or a real estate attorney to find out if any such laws exist.
Being well informed is the best way to make your home buying experience a satisfactory one. Ask questions, do research and then sign on the dotted line. It is better to use a little caution, especially if something looks too good to be true, then to regret a decision made in haste.