Seller financing is a loan provided by the seller of a property to the buyer, to cover part or all of the sale price. This process, also known as owner carry back or owner financing, is used in a variety of situations as a creative financing option. Examples are listed below:
An owner carry back can be used as a vehicle to sell a home if the potential buyer does not qualify for a loan that will cover the full cost of the property. Typically the owner carrying back the loan has substantial equity in the home, but this is not always the case.
Example 1: Joe and tina have found the perfect home which happens to cost $350,000. They go to ABC Bank and apply for a loan, but because of their credit score and the state of the housing market, they can only get approved for $280,000. Dismayed, John and Linda speak with their real estate agent and express their disappointment at not being able to afford the house they want. The realtor then informs them that the owner is willing to carry back part of the purchase price, meaning that John and Linda will have a mortgage from ABC Bank for $280,000 and a private Mortgage with Chuck for the remaining $70,000.
In this case, John and Linda will be repaying two parties for ownership of the home. The $280,000 from the bank will be paid back according to the Interest rates and schedule determined by ABC Bank. The $70,000 the owner will carry back will be paid by John and Linda either directly to the owner, or through a third party servicer with all the terms and conditions agreed upon by both John and Linda and the owner.
Example 2: As in the above example, John and Linda would like to buy a home. However, this time when they visit ABC Bank they are told, due to their high amount of debt, they do not qualify for conventional financing at all. Once again, they go to their realtor who suggests that the owner may be willing to carry back the loan. The owner agrees and finances the couple for $350,000, terms are agreed upon, and the owner starts collecting payments from John and Linda.
If an owner decides they no longer want to collect the payments the owner can sell the note on the house, a process called note buying to a company that provides such a service. In such cases, the owner will be paid a certain amount of cents on the dollar and get a lump sum instead of collecting payments over the life of the loan. The buyer of the note then assumes control of the deed,and John and Linda will begin paying the bank instead of the owner.
Another way an owner carry back would benefit an owner is, after the sale of the home, s/he would be receiving a steady monthly income. In some cases, owners can avoid paying capital gains tax on the sale of their property by carrying back the loan.
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