Pros and Cons of Seller Financing

Pros and Cons of Seller Financing

Looking to investigate the pros and cons of seller financing? One can define seller financing as a type of loan which is provided by the seller of either a property (house, land, office and etc.) or business to the purchaser. This kind of financing is more common in real estate. Since for any person, purchasing real estate the biggest kind of investment that he or she makes, he or she needs some capital for that kind of investment as well. Purchasing real estate can be costly and the purchaser seeks various options such as the most common one: getting a home mortgage. Due to various reasons, the purchaser might not get a home mortgage and might need to turn into alternative methods of which seller financing is one. Seller financing is also known as owner financing. In this kind of financing, the owner of the real estate just doesn’t hand out money to the buyer (as the usual mortgage would do) but gives the purchaser enough credit that the buyer can cover down payments or the price of the house. The seller or the owner doesn’t transfer the title to the buyer till the buyer has fully paid off the loan. To make the whole arrangement legal, the buyer is made to sign a promissory note to the owner. This promissory note entails the terms and conditions of the loan, the interest rate, the consequences and the repayment schedule.

The pros and cons of seller financing:

like any kind of loan and financing scheme, the seller or owner financing has its own share of pros and cons. If one thinks from the buyer/purchaser point of view, then the pros include a cheaper closing as compared to when a bank is involved. There are no bank or appraisal fee to be paid. Even the closing is fast as there is no waiting period to be fulfilled, no long lines and etc. the whole process becomes simpler. For buyers or purchasers that for some reason aren’t able to secure a mortgage, can opt for this financing scheme and pay a smaller down payment as compared to the traditional and common method. On the other hand, the cons are that the buyer may have to pay a higher interest rate and there is a high chance that the owner won’t be interested in lending you money. You would still have to convince the owner.

The main con is that there is balloon payment for the buyer!

For the seller or the owner, the pros can be that he/she can sell of the property as it is without spending too much money on repairs and etc. There is a chance that the buyer may default and in this case the owner can keep the title, the down payment along with keeping the amount that has been paid till yet! On the other hand, the cons are that if the seller ever plans to take back the property, there will be repair and maintenance cost and since the new rule about balloon payments, the owner may have to involve a Mortgage Loan Originator. For the seller, there are more pros than cons!

Pros and Cons of Seller Financing
Morris is a contributing author with Seekyt. I'm an ENFP on the Myers-Briggs personality test. I am an environmental consultant who works with developing countries and developing communities to help them become more environmentally sustainable and economically self-sustaining.