Seller Financing

What is 'Seller Financing'

Seller Financing is a real estate agreement where the seller provides the mortgage to the buyer. It is also known as a purchase-money mortgage. Instead of applying for a conventional bank mortgage, the buyer signs a mortgage with the seller. Often seller financing includes a balloon payment several years after the sale.

BREAKING DOWN 'Seller Financing'

Seller financing rises and falls in popularity along with the overall tightness of the credit market. During times when banks are risk-averse and reluctant to lend money to any but the most credit-worthy borrowers, seller financing can make it possible for many more people to buy homes—and thus make it easier to sell a home. Conversely, when the credit markets are loose and banks are enthusiastically loaning money, seller financing has less appeal.

Advantages to Seller Financing

Buyers attracted to seller financing are often those finding it difficult to get a conventional loan because of poor credit. But the advantage isn’t just easier access to money: unlike a bank mortgage, seller financing typically involves little or no closing costs or appraisals. Sellers are often more flexible than a bank in the amount of down payment. And everything can happen much faster—often within a week.

For sellers, financing the buyer’s mortgage can make it much easier to sell a house—especially in a down market, which often happens when credit is tight. Moreover, sellers can expect to get a premium for offering financing, meaning they are more likely to get their asking price in a buyer’s market.

The Downside

The chief disadvantage for buyers is that they will almost certainly pay higher interest than market-rate mortgages from a bank; it’s the price to pay for “easy credit” with fewer questions asked. Long term, that higher interest could wipe out the savings gained from no closing costs. And buyers will still need to demonstrate their ability to pay back the loan. As with any real estate purchase, they’ll also need to pay for a title search to make sure the deed is accurately described and free from encumbrances.

Sellers face the risk of default—and unlike a bank, they don’t have a staff of employees dedicated to chasing down delinquent payments and filing foreclosure notices. If the buyer stops paying, the seller could incur hefty legal fees. A court might order the buyer to reimburse those costs—but if the buyer is bankrupt, that won’t happen. Finally, most sellers simply can’t afford to offer financing because their own mortgage probably has a “due-on-sale” clause that requires full repayment when the property is sold.