From an investor standpoint, seller financed mortgage note investing is a great way to get consistent cash flow. For example, say you acquired a property through foreclosure of one your non-performing notes.
You can then sell that property via owner financing to a vetted buyer/borrower. Hence, creating or originating a new promissory note to sell later or retain for cash flow.
What Is a Seller Financed Mortgage?
If you have even borrowed from a bank to purchase property, then you are familiar with the lending process. The bank thoroughly scrutinizes a borrower prior to purchase. The borrower puts money down to buy the property.
This is the same process with seller financing – except that not only is seller selling the property, they are also the bank!
Seller financing also known as carryback financing occurs when a seller finances a property instead of a bank. The potential buyer must go through a similar qualification process (credit check, bank statements, work history, income verification, etc.) as when dealing with a bank. They also agree to the same documentation (mortgage/deed of trust, promissory note, etc.) as they would when using a traditional lender.
Yet, seller financing provides options for would-be buyers who could not quit qualify for traditional lending. This form of financing also allows the property seller to obtain cash flow and sell their property at a slightly marked price and interest rate due self-financing.
It’s a win-win scenario for buyer and seller.
First time homeowners or borrowers with spotty credit histories often have difficulty getting financing from a bank or other lending institution. Seller financing is the perfect solution for them.
Benefits of Carryback Financing
Seller financing is a less of a hassle for the borrower. There are less hoops to jump through and a quicker process as the seller is also the underwriter of the note. Borrowers also benefit from fewer closing transactional fees, no appraisal fees, and a faster closing than with regular lending. More flexible lender terms as sellers may be more likely to work out a lower down payment.
From a seller perspective, this type of financing benefits sellers as they can sell their property at a premium. This is also a very safe transaction for sellers. If a borrower stops paying, the property can go through foreclosure and be seller financed again, sept as a rental, or sold outright.
How It Works
Again, seller financing is similar to using a traditional bank. A person comes in with a certain amount of money to put down on the property. A title company or closing agent/attorney is used to make sure the transaction goes smoothly.
No appraisal needed for seller financing unlike with traditional lending. Say you sell a property for $200,000 and a buyer/borrower is willing to pay $200,000. It does not matter if the property appraises for only $175000 as the buy price is determined by what is agreed to by the buyer and seller.
There is no lender to challenge the price as the buyer is the lender! Generally, a buyer can sell a property for a 10-20% premium due to providing funding for property.
Buyers get a title report to ensure clear title. There is also a lender’s title insurance policy as the seller is acting as both seller and financer. Home insurance policies covers their borrower person property and the property itself.
If a borrower/buyer later wants to get better interest rate, they can obtain a loan from another institution at lower interest rate and pay off the current mortgage balance in full to their lender.
When creating a note, it important to use a licensed loan originator to make sure the note is meeting regulatory requirements under the Dodd-Frank Act.
In addition, an experience real estate attorney can a draft note and purchase/loan sale agreement the is incompliance with local, state, and federal regulations.
Have borrower/buyer in a residence with current on-time payments for 6 to 12 months? The seller/lender can sell the note to an investor or keep it for predictable monthly cash flow. Seller financing provides many benefits for savvy investors!
