Every day we hear more about seller financed real estate. It is a very simple but powerful method of financing your home sale by actually becoming the "bank". In a buyer's market characterized by weak credit and low down payment expectations, owner financing real estate will really set you apart from others in the homes for sale marketplace.
One significant reason home sellers are embracing mortgage funding with seller financing is the fact there are so many properties for sale. Lender underwriting guidelines are being re-evaluated in the wake of the sub prime lender meltdown and the record number of foreclosures all across America. I think it's fair to say traditional lenders may be experiencing a public relations problem with consumer confidence.
Let's pause for a moment to reflect upon what it means to be the "bank" in these transactions. Visualize a traditional bank. Do you see very large affluent buildings that feature a lot of marble, glass, and brass? When I think of the banker, an impressive looking man typically comes to mind. He is well dressed and walks the walk and talks the talk of a person that has his "mind on his money and his money on his mind".
When you become the banker in a seller financed transaction, you should also walk the walk and talk the talk of an actual banker. Here are a few of the expectations you should have.
Your buyer should not show up empty handed. It is not a good idea to encourage a "No Down/Low Down payment" arrangement. Somewhere along the way the idea of buying a home with no money down became really popular.
Unfortunately the current housing market with its incredibly high foreclosures and bankruptcy filings is an indication that purchasing a home with no equity is not such a good idea if you are not loaded with cash. When seller financing real estate, you definitely want as much of a down payment as your buyer can provide. Ideally you want at least 5% down, more if possible.
Private mortgage insurance requires at least 20% in equity before insurance coverage can be dropped. Today seller financed homes can be structured with as little as a 5% down payment, or as much as 20% depending on your buyer's credit profile. You will notice I said "credit profile", not just the credit score.
Even though the credit score is a very significant indicator of the buyer's credit management history, there are other factors that contribute to the over-all credit profile. For the purpose of this article, when you seller finance a property, always have the buyer's credit checked. According to the Federal Housing Administration, FHA, the credit score is one of the best indicators of the potential for a loan default. Interestingly, one of the other major indicators is the amount of the down payment.
Your buyer's "ability to pay" is obviously a major consideration. If they don't have the cash flow to support the costs of home ownership, you simply cannot justify financing the deal for them. A very quick way to determine a buyer's ability to pay is the debt to income ratio. The ? DTI? is simply the percentage of your monthly gross income (before taxes), which is used to pay monthly debts.
A generally accepted ratio is 33/38. The first number, 33, represents the 'front ratio?. It includes the percentage of monthly gross income that is used to pay your housing costs including principal, interest, taxes, insurance, and extraordinary housing expenses like association fees, etc.
The second number, 38, represents everything listed above plus consumer debt. Consumer debt includes car payments, credit card debt, and installment loans.
The last two qualities to consider are job stability and character. Job stability of course will help you decide which buyers are likely to have great prospects for long term, successful, continuous employment. Today's employment marketplace is much more challenging than ever. Home sellers must be even more intuitive and insightful than in the past.
Another very helpful characteristic is the evaluation of your buyer's "character".
When you look into the eyes of your prospective buyer, you are literally looking into the "windows of their soul"......the essence of who they are.
That "essence" gives you clues about what to expect from your buyer based on inherent Character traits. For example, is their basic "life force enery" positive or negative? Do they assume responsibility for what has happened in their lives or do they quickly place the blame somewhere else?
The issue of your buyer's character is complex enough for an article unto itself. We describe the issue of character as a "wild card", because it is so subjective.
Each of these buyer criteria on it's on is very helpful in determining different things about your buyer. Collectively they represent a comprehensive system of buyer evaluations that can help you easily determine how to effectively structure their loan package. Issues like the term, loan to value ratio, and interest rate, become very easy to comprehend and layout.
You may have noticed, everything related to the home seller and the home buyer is viewed from a very personal perspective. Think about it. You evaluate the personal financial commitment with the down payment. The buyer's ability to pay is one of the principal considerations of the process. The credit profile reveals not only the credit score, but explanations about what helped to create the score. Job stability and character are given consideration at a personal level.
Here's one more important observation. Many of the traditional banks loan programs include a pre-payment penalty. If your loan is a bad one, you can't even get out of it without paying dearly for the opportunity. By contrast, there is almost never a pre-payment penalty with seller financed loans. As a matter of fact, you are encouraged to pay them off any time it's convenient for you.
After looking at the facts, probably the most compelling reason for the increasing popularity of seller financed home loans is the fact the seller not only wants you to succeed, but he/she actually cares about whether you succeed or not. Seller financed real estate is definitely an idea whose time has come.
