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Seller financing is a popular way to convey real estate from one individual to another. With this type of agreement, the buyer does not have to go through a traditional lender. If you are planning on coming up with a seller financing agreement, here are a few tips for you to keep in mind.
Determining Interest Rate
Ultimately, the decision on the interest rate is going to be up to the seller. It is their property and they can charge whatever interest rate they want. However, with most seller financing arrangements, you should charge only slightly more than the current interest rates in the market. Most experts say that you should charge between two to three percent above what is available in the market place. Most of the time, when you utilize a seller financing agreement, you are working with an individual that has less than perfect credit. Otherwise, they would most likely want to work with a traditional lender to save money. Since you are going to be working with an individual it represents a higher amount of risk, you should be compensated for this risk. This means that you should charge them a premium over what they could get from a traditional lender. Most of the time, buyers that want to get involved with seller financing understand this and are more than willing to agree to the terms.
Terms
You will also need to agree on the terms of the loan. Sometimes, sellers will be willing to agree to an interest-only loan. However, the safer option is to utilize a traditional loan. You want the buyer to be able to buy down some of the equity in the property with each payment. This way, if they need to refinance in the future, they will have a much more probable chance of doing so with a traditional lender. Many times, sellers will amortize the loan over a period of 30 years with monthly payments. If you want the buyer to refinance, you might put in a balloon payment date at an earlier point in the loan. For example, you might make a balloon payment due after 120 months.
Cash Down
When you agree on a seller financing contract, you will also want to make sure that you get something down from the buyer. Requiring the buyer to put cash down on the deal will make them less likely to walk away from the property later on. You want to get them involved in the deal and make it to where they have something to lose if they back out. The amount of money that is required for the down payment is negotiable. However, as a general rule, you should try to get at least 10 percent of the purchase price upfront in cash. If you can get somewhere between 20 and 25 percent, this would be the most ideal situation for you.
