How to Offer Seller Financing on Your Home

You can provide seller financing on your home in a number of ways. The most important thing to realize is that by providing partial or full financing, you will not be receiving some or all of the proceeds from the sale of your home until the buyers' loan to you is paid off.

Difficulty:

Moderately Easy

Instructions

Things You'll Need

• Calculators
• Real Estate Attorneys
• Tax Consultants

If you own your home free and clear:

1. Agree with the buyers on a purchase price acceptable to both parties.

2. Make sure the buyers are prequalified.

3. Ask the buyers for their permission to speak with their lender. Ask the lender what type of credit rating the buyers have and what interest rate they would get if the lender was giving the buyers a loan. Typically a seller-financed interest rate should be slightly above the market rate. (Sellers are not in the business of financing, and if the buyers could go out and get a loan from a normal lender, they would. The seller should be compensated.)

4. Agree with the buyers on an interest rate and length of loan.

5. Compute the mortgage payments. Several computer programs will do this for you as well as give you a running total of the amount of interest and principle paid and the remaining balance. If you don't have access to a computer, ask the lender for a printout, or ask your financial institution to do it.

6. Sign a formal agreement as to the price, loan amount, interest rate and terms.

7. Open an escrow with a title company or hire a real estate attorney to handle the paperwork.

If you still have an existing mortgage on your property:

1. Agree to a purchase price with the buyers.

2. Identify the loan balance on the current loan.

3. Identify how much you are willing to finance. Are you going to finance the entire loan with only a down payment, or are you just financing a small portion to fill the gap between the buyers' down payment and amount of their new loan (possibly 5 or 10 percent).

4. Enlist the aid of an attorney or escrow officer to handle the paperwork for the wraparound.

5. Continue to make your payments on your original loan.

Tips & Warnings

• Carrying back a small loan will allow you to get most of the proceeds (cash) from the sale of your home. When you open escrow or work with an attorney, you will have to let the person who's handling the transaction know that there is a seller carry-back, and the amount and terms. The person handling the transaction will prepare the necessary deed of trust and note.

• Carrying back the entire loan amount will require a wraparound mortgage. This will allow you as the seller to maintain the original loan and payment, and receive a payment from the buyer covering a larger loan amount and payment. Your obligation as the seller is to continue making payments on your existing loan.

• If the buyers fail to pay their payments as agreed to, you may have to foreclose.

• Wraparound mortgages are illegal in some states or are forbidden by some lenders, and if the original lender finds out that there is a "wrap" on its mortgage, it can call the loan due and payable, which means you would have to pay off the entire amount of the original loan.

• As the seller, you will want to verify that the new owners are making the property tax and insurance payments. It is best to write something into the contract regarding providing proof of payment.

• You might want to consider keeping your name on the title of the property - maybe as just a 10 percent owner. This may satisfy some legal requirements regarding the wraparound. Technically, you will still be an owner.