As a buyer, you receive a number of advantages from seller financing, particularly if you are trying to buy with little or no money down:
Seller financing can be arranged as quickly as the buyer a seller can agree on the basic terms of the transaction and the lawyers can draft the loan documents and have them ready for signature. This can be far more rapid than bank financing, which typically (although not always) has long and formal review procedures from the initial loan application to the final disbursements of funds. If either the buyer or seller is in a big hurry, seller financing may be the way to go. This can happen when, for example, either the buyer or the seller is a bout to be relocated to a new city, is leaving on a lengthy trip, or has a personal matter that must be attended to.
On the seller’s side, if a seller can’t avoid all capital gains tax on sale using the $250,000 ($500,000 married) exclusion, it may be very advantageous for him or her to have that gain taxed in a specific year. The more the seller gains, the more the buyer can benefit. The flexibility and speed of consummating a purchase money mortgage may enable the seller to choose which tax year to take the gain. This benefit will be even greater if the house being sold is not he seller’s principal residence so the special exclusion won’t apply.
Seller financing may be much easier for a buyer to qualify for. The seller may be willing to accept back a mortgage from the buyer for part of the purchase price without subjecting the buyer to the stringent qualifying criteria a bank or other traditional lender may impose. If you can’t meet the strict requirements of a major lender, perhaps seller financing will be the answer. Perhaps you had a personal bankruptcy a few years ago, or had a prior house foreclosed on. Traditional lenders may not be willing to extend a loan to you. However, a seller, particularly if you hit it off, might extend you the credit. If your bankruptcy was caused by an unavoidable business failure, a seller may be willing to consider the circumstances.
If you can’t meet the down payment required by traditional lenders, a seller who is willing to accept a lesser down payment may be your sole route to buying the type of home you want. However, be sure to research FHA, VA, and other special options traditional lenders may offer.
Amount of Loan
Many traditional lenders will extend a loan to a house buyer only up to a specified percentage of the appraised value of the house. Seller financing can fill this gap.
When bank and mortgage interest rates get very high, as they did in the early 1980′s, seller financing can be a critically important component of the purchase price for a home. Although rates at the time of this writing are relatively low historically, rates are likely to cycle up and down again in the future.