“Where is the easiest place to get a home mortgage?” That was the question I was asked during a break in a seminar I recently attended in Los Angeles. When my fellow attendee learned I write about real estate, she presumed I would know the easiest mortgage lender.
Then she explained how she had been trying to buy a modest condo or maybe a small house. But her problem is irregular income as a freelance writer. However, she proudly told me her FICO (Fair, Isaac and Co.) score is 672. That’s quite good.
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Next, she explained how she found a “cute” (that usually means small) two-bedroom house not far from LAX (Los Angeles International Airport), which she especially liked because she travels on her writing assignments. She said an “old couple” was selling it before moving to a retirement home.
“Did you ask them to finance your purchase?” I asked. “What do you mean by that?” was her reply.
THE BIG BENEFITS OF HOME-SELLER MORTGAGE FINANCING. Then I launched into my short version of why home-seller financing benefits both home sellers and buyers.
I began by explaining those elderly home sellers probably owned their home free and clear with no mortgage (more than 50 percent of U.S. homes have no mortgage). The sellers also probably need monthly income to enjoy their retirement.
“Did you ask if the sellers would finance your home purchase,” I asked. “It never occurred to me,” she replied.
Then I pointed out the big benefits for her would include no mortgage lender fees, no lender hassles, no appraisal, no loan application, no loan rejection worry, no lender dirty tricks such as “bait and switch,” no junk fees, and she gets to state the interest rate in her purchase offer.
BIG BENEFITS FOR HOME SELLERS. “But why would a seller carry back a mortgage for me rather than taking a cash sale?” my new best friend asked.
As a seller, having carried back mortgages for many of my rental house buyers, I explained the primary benefits include (a) selling the home quickly for top dollar with easy financing, (b) earning an excellent interest income, and (c) security of a mortgage on a property the seller knows well.
Although I didn’t mention it, an added benefit for home sellers, if the buyer doesn’t make their payments on time, is being able to foreclose on the property and either being paid in full at the foreclosure auction or getting the house back to resell for a second profit.
In today’s market, home sellers who are in a financial position to carry back a first or second mortgage for their buyers can earn interest income of 5 percent to 6 percent whereas if they make a cash sale, the best they can do with safety is 2 percent to 4 percent in a savings account or certificate of deposit.
For example, every morning I am reminded of buying a seller-financed house from an elderly widow, Ruth Gordon, who was moving to Rochester, N.Y., to live near relatives. She accepted my purchase offer of 10 percent cash down payment and carried back a 90 percent “interest only” mortgage. After about five years, my tenants bought that house from me, got a new mortgage, and Mrs. Gordon’s mortgage was paid in full.
The reason I think of Ruth Gordon every morning is I weigh myself on her bathroom scale she left behind when she moved out. It even has her handmade fleece cover.
HOW TO FIND HOMES FOR SALE WITH SELLER FINANCING. Few home sellers tell their real estate listing agents “I want to carry back a first or second mortgage for a quick sale for top dollar to create an excellent, secure income for myself.”
However, except in highly competitive multiple-offer home sale markets, many sellers will carry back a mortgage if the buyer asks.
Here are four methods that have worked for me to find easy seller financing:
1–HOW MUCH DOES THE SELLER OWE ON THIS HOME? If you learn the seller has no mortgage (as do over 50 percent of U.S. homes), you have a prospective seller finance candidate. Even if there is a small mortgage, perhaps it can be paid off from your down payment funds.
However, if you discover the home has a large mortgage, it probably is not a seller mortgage finance candidate (unless the seller is wealthy enough to pay off that mortgage or that mortgage is assumable and the seller will carry back a second mortgage).
2–ASK THE LISTING AGENT “WHY IS THE SELLER SELLING THIS HOME?” Presuming the answer to the first question is satisfactory, the answer to the second question might help your negotiations strategy. But your goal is to discover if the sales reason is retirement or another purpose that requires monthly income.
A variation of this question is “If the home seller obtains an all-cash sale, what will the seller do with that money?”
As a buyer looking to buy a home with seller financing, the answer you want is “Well, the money will probably be put into a savings account at the bank.”
Your purchase offer of a reasonable cash down payment, plus a seller carry back mortgage with an interest rate at least 5 percent in today’s market will look fantastic to the seller.
3–VACANT HOMES INDICATE SELLER MOTIVATION. When you discover a vacant house or condo, that is usually a strong signal of a home with a motivated seller, especially if it has been listed for sale at least 30 to 60 days. Longer is even better.
Sharp home buyers who want to buy with seller financing ask their home buyer’s agent to search the local MLS (multiple listing service) for listings older than 60 days. When such a home is vacant, that is an indication of a motivated seller. Then the first two questions should be asked.
HOW TO OVERCOME SELLER RELUCTANCE TO FINANCE YOUR HOME PURCHASE. Having bought many investment properties with seller financing, I’ve learned several techniques to overcome home-seller fears about carrying back a mortgage.
The biggest fear is foreclosure. Most home sellers worry their buyers won’t make the monthly mortgage payments, they will have to foreclose, and will get the home back.
Then I say this is the best thing that can happen to a seller. If I default, I explain how the seller can foreclose on me and either wind up getting paid in full at the foreclosure sale or own the house again to sell it for a second profit.
If that isn’t enough to convince the seller to carry back the mortgage, other methods I’ve used include (1) offering to prepay six to 12 months of mortgage payments at the closing, (2) giving the seller a year’s post-dated payment checks so all the seller must do is remember to deposit a check on the first day of each month, and/or (3) giving the seller a copy of my credit report and FICO score.
CONCLUSION: The best and least expensive method for home buyers to finance the purchase of their house or condominium is with a seller-financed, carry-back mortgage. But not every home can be purchased this way so it is up to the buyer and the buyer’s agent to discover which homes are suitable candidates.
Home-buyer advantages of seller financing include a quick, easy home purchase with no mortgage lender hassles. Home seller carry-back mortgage advantages include a fast, easy sale, for top dollar, with no appraisal hassles, and safe investment income secured by a property the seller knows very well.
The best candidates for seller financing are vacant, free-and-clear houses and condos that have been listed for sale at least 30 to 60 days, offered for sale by anxious elderly or wealthy home sellers. Fixer-upper houses, which conventional lenders won’t finance usually, also fit into these qualifications.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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