Seller Financing Homes for Sale
You’re selling your home and the buyer wants you to finance part of the purchase price by “carrying back” a loan. Should you?
The answer depends on the anticipated ease of selling your home without the financing and your own financial situation. Seller financing is more common in slow housing markets when it’s offered as an inducement to buyers. But it’s also a viable option for sellers who prefer to receive a stream of payments over time instead of a lump sum in cash. If you’re toying with the idea of offering seller financing, consider these six suggestions:
- Think like a banker. Examine documents and reports indicating the buyer’s ability and willingness to pay his or her debts. Verify the buyer’s employment and other sources of income. Get a credit report. Ask for copies of bank statements and other financial documents. If the buyer is applying for additional financing from a mortgage lender, review a copy of the loan application.
- Get a contingency in writing. The purchase contract should specify the amount, interest rate and term of the seller financing and include a clause allowing you to approve the buyer’s financial situation before you go ahead with the loan.
- Call your accountant and your attorney.Lending money to someone who is buying your home will affect your income tax situation. Interest earned on the loan is taxable income. The transaction can be treated as an “installment sale” for tax purposes, enabling you to spread your capital gain on the sale over the term of the carry-back loan. The loan documents should be drawn up by your attorney.
- Set a shorter term. Seller-financed loans usually have relatively short terms — perhaps 5 years or less. Some seller carry-backs are very short term bridge loans that cover a gap until the buyer sells a prior residence or obtains long-term financing. Balloon payments are common too.
- Consider the collateral. Your loan to the buyer should be secured by the property, so you’ll be able to foreclose and evict the buyer if he or she defaults on the loan. The home should have an appraised value equal to or higher than the purchase price, and the buyer’s down payment should be at least 10 percent of the purchase price. Otherwise, you could end up foreclosing on a home that can’t be sold to cover the outstanding encumbrances. A sizable down payment also reduces the likelihood of the buyer walking away from the mortgage obligations.
- Hire a servicer. If you’re willing to loan money to the buyer, but don’t want to handle the paperwork or the payments, you can retain a contract collection or loan servicing company. This company will compute the principal, interest and an outstanding balance on the loan, send payment coupons to the buyer, deposit payments into your bank account, prepare year-end statements and provide other services. Some servicers will purchase the loan outright if you later decide to take the cash.