While many potential homebuyers choose to obtain their mortgage through a bank or other lending institution, it is also possible to receive a home loan from an independent seller. This option, referred to as seller financing, keeps all financial transactions between the buyer and the seller, removing the participation of a third party lender. While this can be a risky enterprise with a few drawbacks, there are a number of benefits to selecting this route for your mortgage.
Expedited Sale
One of the benefits of obtaining seller financing as opposed to a bank loan is that it can speed up the sale process. The process of applying for a loan through a bank can be quite time consuming, particularly if a loan applicant goes through a pre-approval and pre-qualification process before finally signing into the loan. When a seller manages the mortgage financing, the application is simplified, with fewer steps required to obtain their approval.
Simpler Qualifications
Another reason that seller financing can expedite the process of closing on a home is because the qualifications for the loan are much more relaxed. Part of the reason that applying for a bank mortgage can take so long is because of the stringent standards and restrictions for approval. An independent seller will most likely run a credit check to ensure that the buyer’s history isn’t a disaster, but that is typically the extent of financial background checks. Moreover, an seller will also grant loans to those with lower credit scores, which can be a saving grace to those with a spotty credit history.
Reduced Costs
Opting to go with seller financing can also reduce or entirely eliminate the fees associated with closing on a home. When a homebuyer receives a loan from a bank, he or she will have to pay closing costs to the lender and broker who have helped finance the loan and drawn up the mortgage papers. These costs are eliminated in a seller-financed mortgage. An independent seller who is anxious to sell will also be more likely to cut applicants a deal in other areas as well, and thus may accept lower down payments.
Drawbacks
There are specific reasons why seller financing is not more popular, however. First of all, though a legal and binding contract is still drawn up and signed by both parties, entering into business with a seller as opposed to a bank can be risky, since the transaction does not have the backing of a large and reputable institution. Moreover, while some sellers will grant home loans to those with a less than stellar credit history, in return they may significantly increase the asking price or the interest rates.
Homebuyers who need to purchase a home quickly without the hassle of working with a bank or those who fear their applications may be rejected due to a poor credit history may find seller financing to be a viable option. To reduce the risks involved with this kind of mortgage, applicants should be sure to have all papers reviewed by a lawyer or real estate professional, to ensure that the rates and loan terms are fair and reasonable.
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