Selling Your Metro Detroit Home - Seller Financing

Just what is seller financing?
There are two types of seller financing.

1. When a seller helps to finance a real estate transaction by taking back a second note.  This is no longer acceptable to lenders so you will not see this type of transaction in Michigan.
2. When a seller finances the entire purchase if the seller owns the home free and clear.  This is called a land contract

Usually Metro Detroit home sellers do this when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.  Most of the time when a seller offers a land contract the interest rate or the sales price will be higher.

Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller's favor. The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and seller. 

If you are selling your Metro Detroit home and considering such an arrangement, it is critical to thoroughly evaluate the credit history of the buyer first. If you sell the home and the buyer does not pay you might as well not sell the house to the buyer in the first place.  But seller financing can bring a higher sales price as well as complete the sale sooner in some situations.  Seller financing is a way of providing a seller with better income that is available off interest income.

How are the rates set for seller financing? 
The interest rate on an owner-carried loan is usually set originally by the seller and is negotiable. Ask your agent to check with a lender or mortgage broker to determine the current rate on bank loans. Seller financing typically costs less than conventional financing because sellers don't charge loan fees (points).  Sellers will not carry a land contract for a lower return than they would earn if their money was invested elsewhere.

What are the benefits of seller financing?
Seller financing offers tax breaks for sellers and usually a better interest rate than they can earn else where.  It allows buyers who can't qualify for conventional loans to get into a home. If you are a seller, the risks you face are the same as those facing any lender: Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans made against it? You should run a full credit check on the borrower, require hazard insurance on the property, and include a due-on-sale clause. There also are financing, disclosure, and repayment-term requirements that need to be met. It is wise to consult a lawyer when putting together this kind of transaction.