Finding Alternative Financing
Over the past year or so, interest rates have increased at the fastest clip in decades. In fact, the average mortgage rate has more than doubled in the span of just one year.
In response, some homebuyers are turning to non-traditional financing options as a way to fund their purchase. According to data from Realtor.com, the number of listings that mentioned private financing, which includes seller financing, hit 1.08% in February, the highest it’s been in three years.
What is Seller Financing?
Seller financing, also known as owner financing, is a transaction in which the property owner takes on the role of lender by financing the sale to the buyer. It’s a real estate transaction in which the buyer pays the seller in installments, instead of using a traditional mortgage. Essentially, seller financing removes the lender from the transaction, enabling the seller to oversee their own debt.
Typically, in seller financing transactions, the title of the property is handed over to the buyer by the seller at closing. And, from there, the buyer makes payments directly to the seller according to the terms of the agreement.
While seller financing is typically used by real estate investors, interest in seller financing involving residential properties is on the rise, according to real estate professionals.
Pros & Cons
While seller financing may offer potential benefits to the buyer, including more accessibility, more flexible agreement terms, and lower expenses associated with closing costs, the upsides don’t come without risks.
Removing the lender from the transaction also removes a layer of security for both parties. In particular, sellers shoulder the risk of a default. Without the institutional resources of a traditional lender, foreclosure can be a lengthy, tedious, and expensive process.
Meanwhile, for buyers there are several potential risks and drawbacks. These include fewer regulations and consumer protections and the potential of overpaying for the home. In addition, the seller may ask for a hefty down payment to protect themselves against loss.
As with any agreement, before entering a seller financing transaction it’s important to do your due diligence, understand the risks, and consult with a qualified professional. Remember you can save money on a traditional mortgage by shopping around with multiple different lenders. SoFi’s help center for mortgages can be a great resource for navigating the mortgage and home buying process.
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