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| The Rising Popularity of Seller Provided Real Estate Financing | |
| More and more we hear about seller provided real estate financing. It is a very simple but powerful method of financing your home sale by actually becoming the "bank". In a buyer's market characterized by weak credit and low down payment expectations, seller financing will really set you apart from others in the homes for sale marketplace. One significant reason home sellers are embracing mortgage funding with seller financing is the fact there are so many properties for sale. Lender underwriting guidelines are being re-evaluated in the wake of the sub prime lender meltdown and the record number of foreclosures all across America. I think it's fair to say traditional lenders may be experiencing a public relations problem with consumer confidence. Let's pause for a moment to reflect upon what it means to be the "bank" in these transactions. Visualize a traditional bank. I see very large affluent buildings that feature a lot of marble, glass, and brass. When I think of the banker, an affluent looking man typically comes to mind. He is well dressed and walks the walk and talks the talk of a person that has his "mind on his money and his money on his mind". When you become the banker in a seller financed transaction, you should also walk the walk and talk the talk of an actual banker. Here are a few of the expectations you should have. Your buyer should not show up empty handed. It is not a good idea to encourage a "No Down/Low Down payment" arrangement. Somewhere along the way the idea of buying a home with no money down became really popular. Unfortunately the current housing market with its incredibly high foreclosures and bankruptcy filings is an indication that going into a home purchase with no equity is not such a good idea if you are not loaded with cash. When seller financing a property, you definitely want as much of a down payment as your buyer can provide. Ideally you want at least 5% down, more if possible. Private mortgage insurance requires at least 20% in equity before insurance coverage can be dropped. Today seller financed homes can be structured with as little as a 5% down payment, or as much as 20% depending on your buyer's credit profile. You will notice I said "credit profile", not just the credit score. Even though the credit score is a very significant indicator of the buyer's credit management history, there are other factors that contribute to the over-all credit profile. For the purpose of this article, when you seller finance a property, always have the buyer's credit checked. According to the Federal Housing Administration, FHA, the credit score is one of the best indicators of the potential for a loan default. Interestingly, one of the other major indicators is the amount of the down payment. Your buyer's "ability to pay" is obviously a major consideration. If they don't have the cash flow to support the costs of home ownership, you simply cannot justify financing the deal for them. A very quick way to determine a buyer's ability to pay is the debt to income ratio. The ?DTI?is simply the percentage of your monthly gross income (before taxes), which is used to pay monthly debts. A generally accepted ratio is 33/38. The first number, 33, represents the “front ratio? It includes the percentage of monthly gross income that is used to pay your housing costs including principal, interest, taxes, insurance, and extraordinary housing expenses like association fees, etc. The second number, 38, represents everything listed above plus consumer debt. Consumer debt includes car payments, credit card debt, and installment loans. The last two qualities to consider are job stability and character. Job stability of course will help you decide which buyers are likely to have great prospects for long term, successful, continuous employment. Today's employment marketplace is much more challenging than ever. Home sellers must be even more intuitive and insightful than in the past. Another very helpful characteristic is the evaluation of your buyer's "character". When you look into the eyes of your prospective buyer, you are literally looking into the "windows of their soul"......the essence of who they are. That "essence" gives you clues about what to expect from your buyer based on inherent Character traits. For example, is their basic "life force enery" positive or negative? Do they assume responsibility for what has happened in their lives or do they quickly place the blame somewhere else? The issue of your buyer's character is complex enough for an article unto itself. We describe the issue of character as a "wild card", because it is so subjective. Each of these buyer criteria on it's on is very helpful in determining different things about your buyer. Collectively they represent a comprehensive system of buyer evaluations that can help you easily determine how to effectively structure their loan package. Issues like the term, loan to value ratio, and interest rate, become very easy to comprehend and layout. |
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