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.
What is Seller Financing ?
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.
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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.
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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
| Pros (Good Points) | Cons (Not-So-Good Points) |
|---|---|
| Easier approval for buyers (no strict bank rules) | Seller might not get full payment if buyer stops paying |
| Faster deal — less paperwork than a bank loan | Seller has to wait years to get all the money |
| Flexible terms — both sides can agree on payment plan | If buyer defaults, seller may have to go through foreclosure |
| Can help sell a property that’s hard to sell | Buyer might pay higher interest than a bank loan |
| Seller earns extra from interest | Seller still has to handle legal and payment tracking |
| More potential buyers since financing is easier | Risk for both sides if agreement isn’t written clearly |
Seller financing ( Quick Review )-
So, instead of you going to a bank for a loan, the person selling the place just… lets you pay them bit by bit.
- You usually hand over some cash at the start (a down payment) and then keep paying every month.
- How much? For how long? Well, that’s something you and the seller agree on. Could be a year, could be ten.
- It’s handy if banks are being a pain or if you just want the deal done faster.
- The seller still has a hold on the property until you’re done paying.
- If you stop paying, they can take it back — simple as that.
- For buyers, it’s quick and doesn’t need all that loan paperwork.
- For sellers, they get the place sold and make some extra from interest.
Always do your own research before getting into finance or investment.
Conclusion
It’s the seller acting like the bank. Works great if both sides trust each other and put the deal on paper.
So, you learned about pros and cons of seller financing. Now you have an idea about seller financing. If you have any query then comment.
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