As an incentive to move the sale of his home forward, a seller will sometimes indicate he is willing to carry back a mortgage, which means the seller will hold the mortgage and you’ll pay him. He can do this for all or part of your mortgage. Why does a seller do this when he is actually trying to sell you the home? It’s simple. A seller offers seller financing because he wants to obtain the price he wants for the home, by giving you a lower-than-market interest rate in exchange for a higher price, or he may want to earn some extra income. Seller financing is not automatically available with all home purchases. It enters the picture only if either you or the seller offers or requests it, and both you and the seller agree to it.

Yes, there’s the traditional route you can go about getting a loan, but what’s good about buying a home is that there are options available to you, and it’s important to examine them all before making a decision. This chapter shows you how to collaborate with the seller to obtain a financing package that works for you.

In addition to reviewing what seller financing is, we’ll help you decide if this is the right type of financing for you. Just like you can walk away from a home if the features don’t meet your needs, you’ll learn how to turn away from any financing opportunity, including seller financing, if it also doesn’t meet your needs.

We’ll also look at reverse mortgages as a vehicle to finance your purchase. This is a new concept because, until very recently, these loans were usually available only to retired folks living on a fixed income with substantial equity in their homes who didn’t want the hassle of worrying about making monthly payments to the bank.

Traditionally, when you bought a home, you would simply get a loan from a bank and buy the home from the seller, case closed. But what if you don’t get approved for a loan, or you don’t have as much money for the down payment as the bank wants? Or what if the terms of the bank loan don’t quite meet what you are looking for? For example, perhaps the interest rate is too high. Have you lost all hope of ever becoming a homeowner? No, fortunately there is another financing option that just might meet your needs.

With seller financing, you are still buying the home from the seller. However, instead of paying the bank, you agree to sign a contract with the seller to pay the mortgage payments directly to him. The title to the home still transfers to you at the closing. In other words, the seller acts exactly like a bank would act when you buy a home.

This unique type of financing offers several advantages for you, the buyer. First, a seller might offer you a more favorable rate of interest than what traditional lenders are offering. The seller can do this because institutional lenders have to make a certain amount of money from the rates and fees that they charge their customers in order to cover their operating expenses and make a decent profit (they report this profit number to their regulators and shareholders). Sellers, on the other hand, don’t have to make a specific amount of money and they don’t have business operating expenses that they have to cover. They simply are making a deal where they can earn some money and sell their home at the same time.

Keep in mind, however, that just because a seller agrees to seller financing doesn’t mean that the seller will just give away the home at rock bottom loan prices just so he can sell it.

What are the benefits of seller financing? Let’s say that you have fallen in love with a Victorian home in a quiet suburban community. It has everything you want—three bedrooms, two-and-a-half baths, a huge backyard, and a price that fits your budget. However, you’ve gone through some difficulties in your financial life and you have several dings on your credit history, so the bank is offering a substantially high interest rate for your mortgage. Or perhaps you determined that the monthly mortgage payments the bank would require are a bit more than you’re comfortable paying. You don’t have to give up the home, though.

Instead, this is a perfect opportunity to ask the seller to carry the mortgage. He considers a deal where he will offer you financing for 5 years, amortized (revisit Chapter 6 to review this term again) over 30 years at a rate that is a full percentage point below the rate that the bank was offering you. The seller could also offer you the same rate that the bank has, but with less of a down payment. It all depends on what your terms are.

Another benefit for choosing seller financing is that you won’t have to pay points or other fees that you might have to pay with a traditional bank loan. Considering that each point you would have paid would equal 1 percent of your principal loan amount—and loan fees can cost thousands of dollars—you can also save a substantial amount of money.

The bottom line is that you may get to buy that Victorian home that you have been wanting, with a financing package that meets your needs.

But why would the seller agree to seller financing when he can probably find another buyer for his home and be done with the deal? It’s simple! In addition to selling his home at or near his asking price, he also gets an opportunity to earn extra income. That extra income is the interest you’ll be paying him on a monthly basis. So it works for both of you, and the deal is done.

If your credit score is too low to get a traditional loan or there are other obstacles that prevent you from getting a traditional bank loan, seller financing may be the only way to accomplish your goal of being a homeowner. With this financing option, you can negotiate all repayment terms of the loan.

A seller may also be able to sell you his home by using what’s called an installment sale, also called an installment purchase. Installment sales are similar to straight seller carryback financing, but the structure of ownership and financing is different. Unlike a straight purchase with all, or a portion, of your financing carried by the seller, installment purchases allow you to pay an agreed-upon portion of the price to the seller, with him financing the balance for a specified period of time at an agreed-upon rate of interest. This initial payment is usually done at closing, although if both parties agree to some other time frame, that can be done as well. The title does not transfer to you until you have made the final payment on the home to the seller.

Once again, a seller may agree to sell you his property on an installment sale because it affords him a way to sell the property, his main goal, and earn extra income from the sale. He can then spread out his tax liabilities over the years that you are paying him. You benefit from a possible lower interest rate.

If you decide to buy your home by using seller financing or a seller installment plan, you should watch out for a few things, particularly as you get closer to making the final payment and assuming actual legal ownership.

So what do you do? Let’s say a seller offers you a five-year loan—do you take it, do you try to get your mortgage from a more traditional lender, or, if you can’t qualify for a traditional loan, do you just wait? First, compare the terms that the seller is offering against your bank’s or mortgage broker’s terms, if you qualify. Who has the lower interest rate?

Then consider how long you plan to own the home. If you feel that this home is one you’ll stay in for up to five years before you move, the seller’s offer of a five-year loan may be ideal. On the other hand, if you are planning to live in the house for more than five years, the seller’s loan may not work for you. Although we cite a five-year term here, and most seller financing is for a shorter term than what institutional lenders usually offer, there is no time limit on the term of a seller-financed loan.

Consider whether you want to deal with only one person for your home loan or whether you want the convenience of a bank and want to have access to other services it can offer to you. Once you consider all of these factors, you’ll know whether seller financing is right for you.

When do you step away from a home if the financing, either traditional or seller, isn’t right? No specific rules apply, and every situation is governed by its own circumstances.

Work with your agent when you find any sticking points on the financing with your seller and you cannot seem to reach agreement on it no matter how hard you try. For example, what if the seller’s best offer is a high interest rate on a term that is too short for your needs? If you have other lending options, you can tell the seller “Thanks, but no thanks,” and pursue the other options, or you may decide to walk away from the purchase entirely.

However, if your credit is a little tarnished—other lenders have turned you down for a loan, and seller financing is your only option—you could say yes to the current terms if it’s affordable for you and it gets you into the home. Later, you could always look to refinance with better terms.

Are you 62 or older and want to buy a home? How about having your new home pay for itself? It’s possible in a reverse mortgage. This is when the equity in your home pays for the mortgage. When you sell the home or die, the loan is then repaid from the proceeds of the property sale. Most buyers are mistakenly under the impression that a reverse mortgage can be used only when you actually own the home. In 2008, new regulations were issued that allow reverse mortgages to be used for home purchases up to $625,000 or the appraised value, whichever is lower. It’s called a Home Equity Conversion Mortgage (HECM), and it’s federally insured. An HECM must be obtained through an approved FHA lender.

Although this concept may seem alien to some due to its uniqueness, it does work. The equity in this case, like in any form of purchase, comes from the down payment the buyer makes as part of the purchase price. Assuming values increase over time, this equity value rises, and the payments for the reverse mortgage come from that equity value.

Since one can never be certain about a possible dip in market values, HECMs also carry insurance that you pay for when you take out your loan. The payment is called a Mortgage Insurance Premium (MIP) and guarantees that you can never owe more than the value of your home. This fee can be included in the loan, so you don’t even have to pay this out of pocket. However, if you do so, it lowers the amount of loan principal you have available to buy the home. For more information, talk with your mortgage broker or go to the following website: www.hud.gov/offices/hsg/sfh/hecm/hecmhome.cfm.