How to Buy a Home with Seller Financing

If you are self-employed or have bad credit, buying a home with traditional mortgage financing is difficult. Nonetheless, there are ways to buy a new home with extenuating circumstances. One such method involves seller financing. Although seller financing is becoming extinct is some areas across the nation, this is still a favorite approach among real estate investors, and persons looking to buy with a horrible credit rating. Consider the following steps for buying a home with seller financing.

What is Seller Financing?

If unfamiliar with this concept, seller financing involves the person selling a property acting as the bank. Thus, instead of applying for a bank loan, and making a mortgage to the bank, person's buying a home with this option will make monthly payments directly to the owner. However, before seller financing can occur, the home or property must be free of liens.

How Does Seller Financing Work?

When interested in buying a particular property, inquire as to whether the seller is interested in seller financing. If the seller is motivated, and there are no other offers for the home, he or she may be willing to work out a deal. However, if the seller is unfamiliar with seller financing, you will need to inform them on how the process works.

With seller financing, the mortgage remains in the previous owner's name. Thus, the owner is unable to acquire immediate funds. This option can be compared to a rental agreement. The only difference is that the buyer agrees to purchase the home outright in two to three years. Seller financing is perfect for buyers who need to improve their credit. If the seller is interested in having a rental property, and does not need money from the sale to purchase a new home, they may be more willing to consider the possibility of seller financing.

Steps:

1. The seller and buyer must create a contract. Have the contract handled by a real estate attorney to ensure legalities. By signing the contract, the buyer agrees to purchase the home within a specified time frame. On average, seller financing agreements are from 24 - 36 months. During this time, the buyer must improve their credit and qualify for traditional financing. Once the agreement ends, the buyer makes a balloon payment to the seller. At this time, the mortgage is transferred to the buyer.

2. Seller and buyer agree to a monthly payment amount. If the current mortgage is $800, the seller may increase the payment by an additional $300.

3. At the end of the seller financing agreement, buyer must determine a sale price and include this in the contract. The buyer is responsible for paying this purchase price to the seller.

4. When the seller financing period is over, the buyer must apply for a mortgage loan for the amount specified in the contract. Failure to do so is breach of contract. Thus, the seller could seek legal action.

5. Once approved for the mortgage loan, the buyer will make a final payment to the seller, and become the legal owner of the property.