Understanding Seller Financing

In real estate transactions, homebuyers have to obtain some kind of financing. Typically, this additional monetary support comes from a third party institution like a bank or mortgage lender. However, sometimes the seller may also offer financing directly. There are many options available depending on the specific need and situation. Here is a basic overview of seller financing you may encounter in your real estate transactions.

All-Inclusive Mortgage

An all-inclusive mortgage is also sometimes called an all-inclusive trust deed or AITD. The seller holds the promissory note for the entire balance of the mortgage. If there is a down payment, that amount is subtracted from the total.

Junior Mortgage

A junior mortgage is financing meant to cover any part of the purchase price that another mortgage lender won’t. For example, many lenders are hesitant to finance over 80% of the home’s price. The seller can cover the remaining 20% by holding a “junior” mortgage on the property and then receive the proceeds from the buyer’s first mortgage. This type of financing can smooth out the sale of the home but leaves the seller at risk if the buyer defaults on their first mortgage.

Land Contract

A land contract concerns the title transfer part of the home selling process. Rather than give the title to the buyer outright, the seller can give the buyer an “equitable title.” This is a form of shared ownership until the buyer pays off the complete purchase amount. Instead of paying mortgage payments for that time period, the buyer pays the seller directly as if paying them rent.

Lease Option

Lease options are also similar to rental agreements but include a written agreement from the seller to sell the property in full by a determined deadline. The seller can “lease” the property to the buyer and give them time to pay toward the balance while also letting them lock in a purchase price. You can compare this type of financing to a typical “rent-to-own” agreement, though there are more specific legal details involved.

Assumable Mortgage

In an assumable mortgage, the seller assumes the place of the buyer in their existing mortgage agreement. This only applies to certain types of mortgages, like some FHA and VA loans. However, it means the seller takes the buyer’s place in the mortgage and assumes financial responsibility per the existing terms.

Few sellers want to take on the risk of seller financing, but these options can be extremely helpful in certain sales and situations. It’s always a good idea to consult a financial advisor or real estate attorney to decide what the best financial strategy is in selling a property.