Sellers who are financing the purchase of a home can use this calculator to help buyers figure out how much they will owe on the property at the end of the seller-financed period of the loan. Seller financing is common for buyers who either have problem credit or lack the savings needed to make a substantial down payment & need more flexible underwriting guidelines than are typically found on conforming mortgages. Said buyers can then shift from interest only payments, less than interest payments, a balloon loan or regular fixed-rate amortizing payments to a traditional mortgage at some point in the future.
Some mortgages like FHA loans may be fully assumable. Other loans may allow resale while some have an alienation clause which prevents the seller from reselling the property without paying off the note in full. Instruments are typically recorded in public records to protect both parties from disputes. PMM loans typically charge a higher rate of interest than current San Diego's mortgage rates offered by commercial banks & other traditional nonbank mortgage lenders.
Purchase-money Mortgage Balance Calculator
Current San Diego 30-YR Fixed Mortgage Rates
The following table highlights current San Diego mortgage rates. By default 30-year purchase loans are displayed. Clicking on the refinance button switches loans to refinance. Other loan adjustment options including price, down payment, home location, credit score, term & ARM options are available for selection in the filters area at the top of the table.
The Ups and Downs of Buying a Home Through Seller Financing
The real estate market is a tough game for the average aspiring homeowner. In good times and in bad, real estate prices tend to trend upwards. Rising home prices can make it difficult to afford a mortgage. You might not have enough down payment saved for the purchase.
Moreover, you may also not qualify for a mortgage big enough to purchase your preferred home. This could put you at a disadvantage in a competitive housing market. If your offer isn’t big enough, a seller might pass you over for another potential buyer. If you don’t move quickly, you risk getting priced out.
One way for buyers to get past this obstacle is through purchase-money mortgages. Also known as seller financing, this option offers several advantages for entry-level buyers. The flexible terms and payments can help them secure the home they want to buy. Used in the right circumstances, seller financing can help you afford your home.
But seller financing is not very common, and there are many misconceptions surrounding it. Most buyers thus lack the knowledge to use this option to their advantage.
What is Seller Financing?
Seller financing are agreements where a seller receives installment payments from the buyer. Both seller and buyer discuss the terms of repayment, including the rate. They record these agreements in a promissory note. In this scenario, the seller takes the place of the lender. They collect the payments and assume the risks of default. Thus, seller-financing agreements are also known as purchase-money mortgages.
Unlike conventional mortgages, purchase-money mortgages don’t involve any lending whatsoever. In many respects, it resembles buying something on installment payments. Both buyer and seller record the terms of this contract in a promissory note, which details the specifics of the loan.
Here is a step-by-step guide on how most purchase-money mortgages are set up:
- First, a seller agrees to offer financing options to qualified buyers. They would often advertise this in their listings.
- The seller and potential buyer will agree on an annual percentage rate (APR) and a term. Depending on the circumstances, they may also agree on a down payment.
- They draw up legal paperwork with the help of a real estate attorney. Key documents include a promissory note and a mortgage (or deed of trust, depending on the area). The parties deposit these documents at a local property recorder’s office.
- The buyer moves in and assumes the responsibilities of home ownership. In the meantime, the seller holds on to the home title. The buyer must send their monthly payments to their seller.
The agreements are often short-term. Sellers seldom want to hold onto a debt for as long as a bank. On average, they last between five to ten years. At the end, the buyer must provide a balloon payment or refinance to a conventional mortgage. The APR of a purchase-money mortgage is often higher than those of standard mortgages. This is to offset the risks faced by the seller. It also comes in both adjustable and fixed-rate options.
Seller financing is rare in the current property market. As an option, it can be an excellent strategic move for both parties in the right circumstances. As long as they understand the risks, they can leverage its advantages to good effect. A buyer, for instance, can secure a home in a hot market. Sellers, meanwhile, can dispatch with their properties much faster.
There are two kinds of seller financing options available in the market today. This article deals with the most common type, the seller-take-back mortgage. In this option, the buyer and seller bypass institutional lenders. Both parties work out the details of the mortgage themselves.
Meanwhile, you can get a third-party purchase money mortgage from some lenders. These have terms as long as those of regular mortgages and have small down payment requirements. These are available from the following providers:
- Federal Housing Authority (FHA)
- U.S. Department of Agriculture (USDA)
- U.S. Department of Veterans Affairs
- Fannie Mae (via the Home Ready program)
There are different types of financing to consider as well. These include the following:
- All-inclusive mortgages
- Assumable mortgages
- Junior (or second) mortgages
- Land contracts and lease options
Which of these are available depends on the specifics of your situation. Do your research on all before deciding on your option.
Seller financing offers many benefits to a prospective home buyer. They are among the easiest mortgages to qualify for. Sellers are often more lenient with their requirements than other lenders. You can apply for one with little to no down payments. A bank may reject your application if you have damaged credit. But for many sellers, abysmal credit scores are not a deal breaker.
It also speeds up the process of buying the house. Sellers have fewer demands than banks and other institutional lenders. You won’t deal with the paperwork that federal and state government regulators demand.
You also stand to save a lot of money in closing costs through seller financing. Purchase-money mortgages lack the charges associated with bank financing. This way, you avoid several charges like processing, administration, or origination fees. Moreover, you can also negotiate favorable terms from your seller in some cases.
If you can afford a mortgage but can’t quite qualify at the bank, this could be a good option to consider. You can use seller financing to afford a property pricier than your mortgage allows. This is called piggy-backing and can be a good way to enter markets you otherwise can’t afford. This way, you can reduce the amount of money you need to finance through your seller.
Finally, your lenders are often more flexible than most banks. This can come in handy if you’re having financial difficulties. You can ask to renegotiate your payment terms. Be careful, though. Sellers do not put up with excuses for long.
The House Must Go
As a buyer, you may not hold all the cards when financing a home through a purchase-money mortgage. This isn’t always the case. Sometimes, homeowners who offer seller financing might be in a rush to dispose of their properties. Look for homes that have been in the market for much longer. Their owners might be willing to cut you a better deal.
With a purchase-money mortgage, a seller does not receive the proceeds of the sale in a lump sum. But this doesn’t mean they can’t benefit from this system. A seller-financed sale moves faster than one backed by the bank. There are fewer legal hurdles to navigate. This can be a fast way to sell your home. You also have the option to sell your home as-is, eschewing expensive repairs.
Both the seller and buyer must negotiate mortgage terms that work for them. In most cases, sellers will be bargaining from a position of strength. Often, the potential buyer wants to settle the transaction before others outbid them. Because you also keep interest payments, you make a lot more money from your property. And for a time, you still keep the title.
Selling through purchase-money mortgages also offer tax advantages over renting out your property. When you rent out a property, the profits you make are subject to income tax. The mortgage payments you receive from a buyer, meanwhile, count as capital gains and will be taxed at a lower rate. This is useful if selling your home puts them on a higher income bracket, which would raise your taxable rate. Selling via installment will help you avoid raising your income, which will put you below the threshold.
Most of your risks are offloaded to your buyer. To protect their stake in the property, they must keep up with the stipulated agreements. If they fail, you can foreclose on your property and get it back. You can also settle any dispute with them at the property records office.
A purchase-money mortgage is a high-risk agreement for both parties. However, the lion’s share of the risks fall onto the buyer. You are also on a strict time table to refinance the mortgage before the short term ends. You also receive a higher-than-average rate than you would’ve obtained on a traditional mortgage deal.
Outside defaulting, buyers face several other hard-to-anticipate risks. Some might lose homes to debts they cannot see. The seller’s creditors, for instance, may have a lien on the house. When they come to collect, the creditors may evict you from the property. You might even lose your home in rare instances. An unscrupulous seller may sell you a house that they still owe money on. Unlike traditional mortgages that come with title review and insurance, you’re protected in case a property has previous liens you’re unaware of.
Moreover, you may also end up overpaying for the seller’s property. Your total interest payments may be much higher even after refinancing. And that’s assuming the prices go up. And though rare, home prices may drop in unexpected circumstances, which can leave the homeowner underwater.
Hot or Cold Markets
Seller financing is an excellent way to afford a property when your mortgage limits are low. When property prices are soaring, you can use them to seal the deal. Hot markets, however, are another story. Demand is high, which means sellers can expect a large number of qualified buyers. Sellers don’t offer purchase-money mortgages as often because they don’t need to.
In contrast, seller financing is easier to find in cold (or buyer’s) markets. The absence of buyers put pressure on sellers. It may give them an incentive to look at non-traditional financing options. If they want to make a clear sale, they may think the risks are worth it.
Sellers shoulder the risks that a lender would’ve otherwise taken. Rather than receiving money as a lump sum, you instead receive it in increments. Sellers also end up assuming the risks the lender would’ve taken. If their buyer defaults, they can only foreclose on their property. They also keep the deed to their property until the buyer pays them in full. Thus, they take on most of the liability when their property is damaged.
You should only sell a property through a purchase-money mortgage if you don’t need that large lump sum. Reconsider offering this option if you still have a mortgage to pay. If your buyer defaults on your agreement, you wouldn’t have a lot of money to cover your own mortgage. Your mortgage provider may not even let you offer seller financing if you have a large balance unpaid.
You can remedy this by using your buyer’s down payment to clear the rest of your mortgage. Suppose your mortgage has a remaining balance of $10,000. You can request a down payment of at least $10,000 from your buyer. This will cover the remaining balance and let you self-finance the rest of the sale. In contrast, your lender will not allow you to sell the property that way at all if you owed $175,000 on a $300,000 home.
Comparing Your Options
One of the biggest drawbacks of purchase-money mortgages is their long-term costs. Let’s run the numbers on your two main options. The first is that you pay for the entire house through seller financing and refinance years later. In the second, you take out a conventional mortgage and use seller financing to cover the difference.
In our scenario, you have already received pre-approval for your mortgage. Moreover, you are well on your way to improving your credit score. You can qualify for a better mortgage in a few years. But you want to move into a new neighborhood where the homes cost around $300,000 on average. You don’t want to be priced out further, so you choose to buy a house now. For this example, we will assume the following details:
- Your lender has pre-approved you of a $200,000 mortgage with an APR of 3 percent.
- While your credit is not quite stellar, you have a healthy cash flow. At your current budget, you can afford at most $2,000 monthly principal and interest (P+I) payment. We shall also presume you’ve already budgeted for your escrow costs.
- You can afford a down payment between 10 and 20 percent of a home priced at $300,000. This amounts to at least $30,000 and at most $60,000.
You find a property owner who offers seller financing. Their house is worth $300,000. You agree to a 5 percent fixed APR for a term of 7 years. The owner also accepts your offer to pay a 10 percent down payment and $1,500 a month. This option will let you save $30,000 and about $500 each month. If you take this offer, here’s how much you can expect to pay:
Fixed-Rate Purchase Money Mortgage
Home Price: $300,000
10% Down Payment: $30,000
Loan amount (Principal): $270,000
Interest Rate: 5%
Term: 7 years
Monthly P&I payment: $1,500
|Mortgage Balance after 7 years||$232,376.78|
By seven years, you now qualify for an APR of 2.2 percent. By this time, you take out another mortgage to pay off your remaining balance. You apply for a term of 15 years and pay $2,000 in closing costs. Using our basic mortgage calculator, here’s how much this new mortgage will cost.
15-Year Fixed-Rate Mortgage
Loan amount (Principal): $232,376.78
Interest Rate: 2.2%
Closing Costs: $1,200
|Monthly P+I Payment||$1,516.86|
|Total Payments (minus closing costs)||$275,034.98 ($273,034.98)|
Taken together, and the cost adds up.
|Total Payment (Both Mortgages)||$429,034.98|
|Total Interest (Both Mortgages)||$129,034.98|
Counting on Rates
Refinancing your mortgage on a timetable is not an optimal strategy. Mortgage interest rates are unpredictable. You can never be sure whether rates will go up or down. You might be due to refinance when the rates are high. And that’s assuming your lender grants something close to the market rate. Be aware of this risk when choosing seller financing. Furthermore, refinancing involves expensive closing costs, which is typically around 3% to 6% of your loan amount. Consider this added expense when you refinance your mortgage.
As an alternative, you can finance much of the home through a conventional mortgage. You pay the full 20 percent down payment and pay off the rest through seller financing. In effect, you will be paying two mortgages. Because of this, you and your seller agree to lower your piggy-back mortgage’s APR to only 4 percent.
Home Value: $300,000
20% Down Payment: $60,000
15-Year Fixed-Rate Mortgage
Monthly P+I Payment: $1,381.16
Fixed-Rate Purchase Money Piggy-Back Mortgage
Term: 7 years
Monthly P+I payment: $550 (as per agreement)
This leaves you with an extra $68.84 on your mortgage P+I budget. You can use this amount to pay extra to either mortgage. But let’s see how much you’d pay if you stuck with your minimum payments. By the last month, you would have paid off your entire piggy-back balance. This eliminates your balloon payment altogether. Here’s where you’d be:
|Total P+I Payment (Conventional Mortgage)||$248,609.39|
|Total Interest (Conventional Mortgage)||$48,609.39|
|Total P+I Payment (Piggy-Back Mortgage)||$45,885.76|
|Total Interest (Piggy-Back Mortgage)||$5,571.52|
|Total P+I Payment (Both Mortgages)||$294,495.15|
|Total Interest (Both Mortgages)||$54,180.91|
Compared with our first example, you would’ve spent $74,854.07 less on interest. By the end of the first term, you can start paying extra on your mortgage to the tune of $618.84. You can save even more if you cleared your piggy-back mortgage first.
Set Your Priorities Straight
Which scenario is right for you will depend on your financial situation. You'll save the most amount of money through the second option (and even more if you paid extra). Sometimes, though, you must focus on some debts over others. For instance, paying off $30,000 in credit card bills might be better than paying a $60,000 down payment on a house. High-interest debts eat away at your cash flow and savings. To maximize your cash flow, prioritize paying high-interest debts before focusing on mortgage payments.
Sealing the Deal
Seller financing relies on mutual agreements to succeed. Both buyer and seller can add protections to help the financing go smoothly. Be open and honest about your concerns with the other party. This way, you can work out a deal that secures both your interests and reduces your risks.
Consider offering to pay a larger down payment. This might seem counterintuitive. Negotiating a lower down is part of the appeal of seller financing, after all. But this could work to your advantage. A down payment protects the seller from defaults. This can assuage any apprehensions they may have. By offering a larger down payment, you also show that you are serious about the deal. You can improve your chances of sealing the deal by offering at least 10 percent of the home’s value as a down payment.
Professional help can go a long way in securing your side of the deal. Experts have much to offer even if you don’t need them through the entire process. A real estate lawyer will help you draw up your documents and provide valuable advice. Their expertise can guide you throughout the process until you close the deal. If you’re concerned about tax implications, consult a certified public accountant (CPA).
Extra Protection for Sellers
If you’re thinking of seller financing, you must act like a lender. It pays to understand why lenders act the way they do toward specific buyers. While you can afford to be more lenient, you must consider many of the same things. An honest buyer will agree to a few reasonable requests throughout the negotiations.
Know the buyer’s credit score. Always run a credit check before you enter any mortgage financing agreement. Buyers can even use this as an advantage. If they can receive a pre-approval, they prove that they are in good financial standing. It also opens up seller financing as a piggy-back mortgage option.
Dependability is crucial to the success of seller financing. Only enter negotiations with people you can trust. In the absence of traditional covenants, references are invaluable. Whether people can vouch for a buyer can tell you a lot about their ability to pay.
Seller financing options make up only a small fraction of the real estate deals each year. Despite their risks, they do offer some advantages over traditional financing methods. They might not be common, but they could be the right choice for you. Understand the risks they entail and make the appropriate preparations.
Short-term financing is a good way for sellers to make more money from their properties. Buyers, meanwhile, can find a home of their own with terms they can afford in the present. Both buyers and sellers can also avoid the costs that come with federal and state government regulators.
Examine the costs of seller financing before agreeing to a contract. The high interest rates may end up costing you more for your home in the long run. Sometimes, this can be an acceptable trade-off. There are, of course, other ways you can save money on your mortgages. Once your finances are stable, you can use your spare cash for regular extra payments.
Consider your exit strategy before signing onto a purchase-money mortgage. Turn your attention toward improving your financial situation in the meantime. This way, you can refinance to a cheaper conventional mortgage. If you qualify for a conventional mortgage from the get-go, consider getting a piggy-back mortgage instead. In the long run, it can help you cut costs and maximize your savings.
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