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Frequently
Asked Questions
Investing
in Real Estate - Q & A
Seller Financing
Q. What are the benefits of seller financing?
A. Seller
financing offers benefits to both buyers and sellers including
tax breaks for the seller as well as offering an alternative when
conventional loans can't be found.
The risks
involved are the same risks facing any lender. Is the borrower
a good credit risk? Will the property hold enough value over time
to allow for the repayment of all loans made against it?
Sellers should
run a full credit check on the borrower, require hazard insurance
on the property and include a due-on-sale clause. There also are
financing, disclosure and repayment-term requirements that should
be met.
Q.
How are the rates set for seller financing?
A. The
interest rate on an owner-carry loan is negotiable. Ask your agent
to check with a lender or mortgage broker to determine the current
rate on institutional first (or second) loans.
Seller financing
typically costs less than conventional financing because loan
fees (points) typically aren't charged. The interest rate on a
seller-carry loan will also be influenced by current Treasury
bill and certificate of deposit rates. Sellers usually aren't
willing to carry a loan for a lower return than they would earn
if their money was invested elsewhere.
Q.
What is seller financing?
A. Homeowners
who are anxious to sell often consider seller financing, which
may include taking back a second note or even financing the entire
purchase if the seller owns the home free and clear.
Seller financing
differs from a traditional loan because the seller does not give
the buyer cash to complete the purchase. Instead, it involves
extending a credit against the purchase price of the home while
the buyer executes a promissory note and trust deed in the seller's
favor. These special circumstances must be acceptable to the lender
who makes the first mortgage on the property.
The necessary
paperwork is prepared by the title or escrow company after the
terms are worked out between the buyer and seller.
It is critical
to thoroughly evaluate the creditworthiness of the buyer first.
Fear of default makes many sellers reluctant to take back a second.
But seller financing can bring a higher price plus complete the
sale sooner in some situations.
Resources:*
IRS Publication 537, "Installment Sales." Order by calling
(800) TAX-FORM.
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