Should You Accept Seller Financing?

There are many good points to be considered in seller financing. In cases where the buyer finds it difficult to get a conventional loan, seller financing may be the solution. From the buyer’s point of view, seller financing costs less because there are none of the many fees and closing costs associated with the loan.

With a conventional loan, having a substantial down payment is necessary to avoid insurance and high interest rates. If the buyer does not have a down payment - or only a small one - seller financing can be negotiated in a way that does not penalize him or her. Repayments can be negotiated to favor the buyer, much more so than in a conventional loan.

The buyer needs to be aware that when seller financing is in place, there need be no check on the condition of the property, such as would take place with a conventional loan. If repairs are needed, this will naturally be in the seller’s favor rather than the buyer’s. However, if the state of disrepair is obvious, then the buyer may be able to negotiate a price difference to account for it. Some repair problems are not easily visible, so this is a risk for the buyer. He must agree to purchase the property ‘as is’.

Another risk for the buyer is if the seller still owed money on the property and does not pay it off. The buyer could pay his installments promptly every month and still not receive anything at the end but foreclosure. There is risk for the seller as well, of course. He should run a credit check on the buyer, but this can be difficult. The fact that the buyer is accepting seller finance is often due to him being unable to get a conventional loan. And if he does not qualify for a conventional loan, there is usually a reason for it.

That’s not to say the buyer would necessarily be in any way dishonest - but he could have trouble paying off a loan. He might agree to the down payment requested by the seller and then default on that, if he does not have it. So the seller could waste a great deal of time and be disappointed with no sale at the end.

What it comes down to is trust and honesty from the two parties involved. If both do the right thing and are honest in their dealings, then seller financing can be a good thing for both.

This is the seventh podcast of our series on getting the best home mortgage.