Creative Financing
Seller
Financing
As the seller, you have the option of financing the buyer's purchase
with the equity you have in the property. You can finance part or
the entire mortgage for the buyer. Before setting-up a private mortgage,
it is wise to consult with your attorney.
Carrying Back a Second Mortgage
In the case of "carrying back a second mortgage", the seller loans
the buyer part of the seller's equity. In this scenario, the buyer
would finance the majority of the loan with a traditional mortgage
lender and finance the remaining amount with the seller. Typically
the buyer would pay a slightly higher interest rate on the loan
financed by the seller.
The Purchase Price
The seller and buyer's mutually agreed upon purchase price for
the property. As the seller, you should know up-front that the buyer
would like you to finance the deal. Knowing that you will be financing
the deal may affect your willingness to make adjustments to the
sales price.
The Down Payment
The size of the down payment may affect the buyers commitment to
honoring the mortgage contract. The larger the down payment the
buyer invests, the stronger his/her motivation to protect the investment.
In addition to making the monthly payments, the buyer's commitment
to the investment would include a willingness to maintain and upgrade
the property, as well as make tax and insurance payments.
The Interest Rate
At a minimum, the interest rate you charge should match current
interest rates traditional mortgage lenders are offering for loans
of the same term. You may want to charge an additional percentage
point as compensation for the work involved with servicing the loan.
The Buyer's Credit & Income
You'll want to review the buyer's credit history to determine
the buyer's willingness to pay his/her debts. A credit report will
give you a better understanding of the buyer's financial history.
Red flags would include late payments and loan defaults. If a buyer
has a less than commendable credit history, you may decide not to
finance the loan or you may require a larger down payment.
In addition to the buyer's credit history, you'll want to review
the buyer's income sources. Is the buyer's salary sufficient to
make the monthly payments? Does the buyer have additional income
sources that could be accessed if the buyer lost his/her job?
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Amortization
The amortization period is the length during which the loan is
repaid. The longer the amortization, the longer you are at risk
that the buyer will default on the loan.
Balloon Payment
A common practice is to have the full amount of the loan due on
a certain date, usually in 5 to 10 years. As the lender, this gives
you a profitable short-term investment with the provision that your
principal investment will be recouped in just 5 to 10 years.
The buyer is usually in a better position to secure traditional
financing after 5 to 10 years. Both the buyer's equity in the property
and record of timely mortgage payments can help the buyer secure
a loan to cover the balloon payment.
Escrow for Tax and Insurance
Lenders typically require borrowers to pay 1/12 of their annual
taxes and insurance costs as an escrow payment due with each mortgage
payment. Then, the lender makes the borrower's annual tax and insurance
payment. While this adds time and hassle to the seller-financer,
it also protects you from the unfortunate situation of having a
buyer make his/her mortgage payments but not tax and/or insurance
payments.
Lender's Title Insurance
A smart investment is a lender's title insurance policy. The policy
protects your lien on the property from being defeated by a prior
lien or other interest in the property, which, if exercised, would
wipe out your security. Things that can affect your rights as the
seller-financer include marriage, divorce, death, forgery, a judgment
for money damages, a failure to pay state or federal taxes, and
more. Be sure to include the cost for your lender's title insurance
as one of the buyer's closing costs.
Closing the Sale
Both buyer and seller will be responsible for paying the usual
closing costs. You will also want the buyer to pay all the costs
associated with setting up the mortgage financing. This would include
the cost of having your attorney create the mortgage note.
Contact
us for more information about buying or selling property in
Boca Raton, Florida, United States or Internationally
