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5 Things to Know About Seller Financing

If you are thinking about buying or selling real estate with seller financing, here are five things you should know before you jump in:

1. Check out the other party

This is a major financial transaction for both parties. Sellers should do a credit check and look into the buyer’s ability to pay. Buyers should verify that the seller has the ability to sell the property, and that any underlying financing is not in default.

2. Make sure it is legal for the Seller to provide financing

If the property being sold is the seller’s primary residence, there is no restriction on the seller’s ability to provide seller financing. If not, and the property is going to be the buyer’s primary residence, then under federal and state law the seller will either need a mortgage loan originator license, or an exemption from the state Department of Financial Institutions.

3. Don’t Automatically Use a Deed of Trust

In both Washington and Idaho, the vast majority of home loans are made using two primary documents: a promissory note and a deed of trust. However, for the seller who is also providing financing, there is another option that may be better in many circumstances: a real estate contract. The primary benefit to the seller is that a real estate contract allows the seller to take back the property more quickly than a foreclosure under a deed of trust. While real estate contracts are less common than they once were, it is still a viable option, and worthy of consideration.

4. A professional escrow company is your best friend

It is always a good idea to use a professional escrow company to service a seller financing loan. The escrow company is a neutral third party whose sole purpose is to manage the payments, notices and documents involved in seller financed transactions. For a very modest fee, the escrow company takes the burden of collecting payments off of the seller, and gives the buyer the peace of mind of having a neutral third party handling the payments and bookkeeping.

5. “Wrap” financing probably violates the terms of any existing loans on the property

It is not uncommon for a buyer and seller to enter into a seller-financed home sale when the seller already has bank financing on the house – known as “wrap” financing. Typically, the existing financing requires the loan to be paid in full if the property is sold. Done right, the risk of the bank demanding payment in full is minimized, but the parties need to enter the transaction with their eyes open about this possibility.

Conclusion

Seller financing can be a real benefit to both buyer and seller, but it has to be done right. Treat your seller financing transaction like the major financial event that it is, and get some professional help setting it up.

 

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