Q: Marsha, I’ve been renting my home for 10 years. The owner has decided to sell. I love it here. He said he’d sell the home to me for a reasonable price. If I put money into the transaction, a down payment, he offered seller financing to help me purchase his rental. What is seller financing exactly?
A: Seller financing is another method in which to mortgage and purchase a home. If the sellers own the house free and clear, they may take the role of traditional lender. They’ll run credit, ask for a reasonable down payment, and have the transaction recorded. As with all mortgages in California, it will involve a promissory note and a recorded deed of trust. Sellers can also finance a second mortgage. In that situation, the buyer obtains a traditional loan from a bank and with the bank’s knowledge creates a second mortgage with the seller.
I had clients who used seller financing with great success. They purchased their home, and the owner financed the first mortgage. It was a sound business move for everyone. The house they purchased was a fixer — “teardown” is what the home inspector labeled it. Banks and traditional lenders would have been reticent to lend any money on it. By financing the house himself, the seller was able to sell the less-than-perfect home at a good price. The other advantage to the seller was deferring his capital gains.