If you want to buy a home but are unable to qualify for a traditional mortgage, you should consider asking sellers if they'd be willing to finance the sale for you. This is also known as a seller carry back. Before doing so, however, it's important to understand the pros and cons of getting a mortgage from the home's seller.
Pros for the Buyer
Seller financing offers many advantages to the buyer. These include:
- If you don't qualify for a traditional mortgage, you may still be able to obtain seller financing
- There may be lower closing costs because many of the bank's "junk fees" are eliminated
- The sale can possibly close more quickly than if a bank were involved
- If you decide to refinance with a traditional lender, you'll probably avoid prepayment penalties
- You may be able to negotiate the interest rate, payment amounts, late charges, interest rate adjustments, balloon payment amount and date, and other terms of the loan
Cons for the Buyer
However, it's important to remember that you may encounter some disadvantages to seller financing, particularly if you're accustomed to bank-offered mortgages. These disadvantages include:
- If you're unable to qualify for a traditional mortgage, the seller may be able to get more money from you or charge a higher interest rate
- If the seller is sloppy with paperwork, you may have trouble getting receipts, statements or tax documents
- The seller may set shorter terms for the loan, and require a balloon payment, which forces the buyer to find a large quantity of money or refinance the loan
Questions for Your Attorney
Before entering into a sophisticated legal transaction such as buying a home, it makes sense to hire a real estate lawyer who can guide you through the legal aspects of the purchase. A real estate lawyer will be familiar with the typical sales and loan documents—even if you're using seller financing.
Among the questions to consider asking your attorney:
- Have you previously represented clients who are purchasing homes?
- Do you have experience working with clients who are obtaining seller financing?
- How much do you charge for your services?
- Can I expect the sellers to pay some part of your fee?
- Will you make sure the seller provides a good title to us?
- What sort of inspections do we need?
- Should we get an appraisal?
- What's the difference between a lease-purchase and seller financing?