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Credit-Challenged Homebuyers Explore Seller Financing

It's one of the best-kept secrets in real estate, and it's not the sort of opportunity that's likely to be advertised. The prospective seller might not have considered it, either. But ask and you might find that the home seller is willing to help finance your home loan. How's that for one-stop shopping?

Homebuyers aren't really trained to see the home seller and home financing in the same light. But seller financing can be a great deal for both parties, and it's definitely worth exploring with your real estate agent or buyer-broker acting as facilitator. Here are several realistic options that could work to everyone's advantage:

Good Return for Sellers with Paid-Off Mortgage: Say the buyer had some past credit problem that discourages traditional lenders from approving a mortgage at a decent interest rate. If the sellers' mortgage has been paid off, they may be willing to hold the mortgage for the buyers and still make a better rate of interest return on the investment than would be available to them by investing the proceeds of the sale in a bank certificate of deposit.

Partial Second Mortgage from Seller: If the buyers don't qualify to borrow quite enough to purchase the house, the seller may be willing to kick in with a second mortgage that makes the purchase possible.

Assumable Mortgage with Second from Seller: In the event that the seller holds an older VA or FHA loan, it is entirely possible that the buyer could assume the remainder of the first mortgage and the seller would take back a second to cover the gap between the first mortgage, down payment and selling price.

Installment Sales Contract: The seller continues to hold legal ownership of their property but transfers the obligation of paying mortgage, tax and insurance to the buyer. That's good news for the buyer who's having a hard time qualifying for a mortgage. The buyer moves into their dream home, becoming the "equitable" owner. But the seller retains legal title until the buyer pays off their obligation. It works best when the seller has a loan that's assumable.

Seller financing has additional benefits in terms of reduced closing costs, the option to pay off the sellers at any time & refinance, flexible terms, no need for appraisal, and a steady income for sellers. But use your broker to investigate it and make sure both buyer and seller understand their financial obligations.

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