How to Use Seller Financing to Your Advantage
Seller financing can be a useful tool to not only the Buyer but also to the seller. With unpredictable loan rates and difficult qualifying criteria, seller financing can bridge the gap for a short-term (3-10 year) period of time.
Two significant advantages to the Seller who offers a convenient and flexible financing package to prospective Buyers is that it makes the property more marketable and defers the Seller’s tax liability on the profits. Not only does the Seller avoid the entire profit tax due in the year of the sale, but the seller earns interest on the portion of the note principal that represents the tax not yet due and payable.
Closing can be faster in Seller-financed properties due to the conventional rule that Borrowers must be given a Closing Disclosure form three days before closing. If the loan would need to be modified, the three-day waiting rule would start over and and cause further delay.
The mountain of legal disclaimers and paperwork involved in a conventional mortgage can slow the process down, and conventional lenders can — and often do— change their terms days before closing.
Buyers save on the typical lender costs such as loan origination fees, discount points, mortgage insurance premiums, processing fees, and other added expenses. When the Seller acts as the lender a lower downpayment is possible and is negotiable between the Buyer and Seller— where as most conventional mortgages require a 20% downpayment. Sellers can dictate the qualifying process for the potential Buyer and shorten the typical closing time significantly.
If a seller-financed sale seems appropriate for your circumstances, have a title company check for any outstanding liens or other title issues, and hire a lawyer to prepare the paperwork, including the note, deed of trust, or mortgage documents. Consult with your CPA or tax attorney for the best way to structure the loan to be tailor-made for the your individual financial situation and tax responsibilities.
