Can You Refinance with Seller Financing?
In a hot real-estate market, seller financing is not as prevalent becauise of the availability of home buyers with access to traditional mortgage financing for home purchases. When the market softens, however, sellers may be willing to finance the home themselves to sell it or create some cash flow from the property. A seller may expect these loans to be refinanced in time, but the deal must be structured correctly to allow for this.
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Incentives to Buyer
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Many seller-financed mortgages have built-in provisions to encourage the buyer to refinance as soon as possible. This could be a higher interest rate than a borrower could receive with a bank or mortgage company. The buyer wants a lower rate in time, so he has an incentive to refinance. A seller may also structure the mortgage so that the buyer pays on the loan as if it is a 30-year mortgage, but the remaining balance must be paid off in a certain amount of time, commonly five to 10 years. At that point, the buyer would usually refinance the loan.
Seller's Motivations
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A seller may want the buyer to keep paying on a seller-financed mortgage. It could be used as a way to defer capital gains, thus reducing his income tax liability. He may also want to structure the mortgage to provide him with income each month to cover living expenses if he is retired. In these cases, the seller may include penalties for an early payoff in the mortgage agreement. If the seller is carrying a mortgage and the land is titled in the buyer's name, the seller cannot prevent a refinance, but the buyer would need to pay whatever prepayment penalties were specified in the mortgage agreement.
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Land Contract
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Some sellers may use a land contract as a way to finance the home. With a land contract, you make agreed-upon payments to the seller and at the end of the contract term, the seller transfers the property to you legally. Since the property is in the seller's name, a refinance would essentially be an early purchase, which must be allowed by the contract. If you believe that you will want to refinance eventually, be certain that you and the seller agree to this in advance and write it into your refinance contract.
Rent to Own
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You may take possession of a property with a rent-to-own agreement. With this arrangement, you sign a lease with the seller, who retains the title to the property. You make your rent payments according to the lease with a certain amount of each payment possibly applied to the eventual purchase price. Much like a land contract, a refinance of this agreement is an early purchase and is subject to the terms of your lease.
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