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Wednesday, February 6, 2008 posted by Tommi Crow

Bridge to Home SaleThere are a number of ways to offer seller financing on real estate.    How to structure the offer depends upon whether you own your home free and clear or whether you have a loan or loans against the property.    

Please read previous posts on the pro’s, con’s and risks of seller financing before you decide whether bankrolling your sale is the right step for you.

Instructions for Seller Financing with an outstanding loan:

  1. Seller and buyer agree to a purchase price.
  2. Seller verifies the outstanding loan balance on the current loan or loans.
  3. Seller should pre-qualify the Buyer, as any lender would do. (Have the buyer provide 2 years tax returns, a pay check stub year to date and a copy of their credit score and report)
  4. Parties determine how much of the gap exists between the purchase price and the outstanding balance, and how much of that balance the seller is willing to finance.   (For example:   If the agreed upon purchase price is $250,000 and the outstanding loan balance is $150,000, the gap is $100,000.  How much of the $100,000 will be financed 80%, 90%, etc.   The remaining percentage will be paid to the seller as a down payment.)
  5. Parties determine the interest rate and length of the loan term for the seller financed portion of the purchase.
  6. Parties calculate the monthly payment amount of the seller financing.
  7. Hire an attorney or title/excrow officer to draft the paperwork for the “wrap around” loan. 
  8. The seller must continue to make the payments on the original loan.
  9. The seller should require proof of payment for all insurance premiums and property taxes.

NOTE:   A wraparound mortgage requires that the seller receives a payment from the borrower that covers the original mortgage payment and the payment on the second or seller financed portion.

Wraparound mortgages are illegal in some states or may be forbidden by some lenders.   If wraparounds are not allowed, be warned that the lender can call your note due in full and payable now for violating you original loan terms.  If you do not know the terms of your original loan, please check with your lender.

Instructions for Seller Financing with No Outstanding Loan.

  1. Seller and Buyer agree to a Purchase Price for the Property.
  2. Seller should pre-qualify the Buyer, as any lender would do. (Have the buyer provide 2 years tax returns, a pay check stub year to date and a copy of their credit score and report).
  3. Determine the interest rate and length of the loan.  (Typically, seller financing carries a higher interest rate than the bank would charge due to the risk.  Most seller financed loans are amortized over a 30 year period, but the outstanding loan balance will be due in full in 5 to 7 years.  This is arrangement is called a ballon note or loan.  It provides the buyer time to straighten out a credit problem, accrue job history, etc. which will enable them to refinance at a later date and pay off the balance due to the seller.)
  4. Calculate the mortgage payment.   (This can be done on the internet or provided by any lender.   The report will show the interest and principle paid and the remaining balance due the seller.)
  5. Hire an attorney to draft the formal agreement, spelling out the sales price, loan amount, rate of interest and terms.   The attorney or title company can also close the transaction.

Note:   Seller should always have proof that property taxes and insurance premiums are being paid by the borrower.  Also, it is a good idea to add a late payment fee to the agreement.  Late fee’s will help keep your payments coming on time.   In the case of loan default, the seller may have to foreclose and take the property back.