What Is Seller Financing And How To Use It

What Is Seller Financing And How To Use It

One of the ways you can finance a real estate transaction is using what is called using seller financing. 

For example, when a seller is trying to sell a property and they have not been able to sell it, they may be very motivated to hold a mortgage on this transaction. That’s normally known as a vendor take-back mortgage. 

Another example is, let’s say there is a property out there and it’s worth $300,000. And you’d like to buy that property, however, you don’t have the money, or you don’t have all the funds. And maybe the bank doesn’t want to lend you all the money. 

You then approach the vendor, the owner, or the seller about taking back a second mortgage.

What that means is as part of that sale of the $300,000 that maybe they have enough equity. So maybe they have $100,000 equity in there. And they say, okay, “I’ll hold the mortgage for $100,000”. 

The reason why seller financing is advantageous to you is that usually, the terms of that mortgage are a lot better than what you would get at a bank or a private lender.

Because the seller is motivated you can usually negotiate with the seller for very low rates of interest.

Let’s say, for example, the sellers are willing to hold a mortgage for $100,000. You could say, okay, I want that at 0% interest for five years, I have done that before when I purchased the property and I have asked the seller to hold back a second mortgage for 0% over five years. 

I also used to be able to get that seller as a second mortgage holder so that I wouldn’t have to put any down payment.

Nowadays banks actually want you to have some money as part of the down payment. 

So that is another scenario that you would have to look at when trying to get financing. Usually, a mortgage broker can help you find a lender who will provide a loan when there is seller financing. 

Another really interesting situation is if the seller owns the property outright which means they own 100% of the property without any mortgage on it. So if they don’t have a loan they may be willing to finance the entire loan for you. Maybe they are an investor and they bought the property 20 years ago. The property now has no mortgage on it.

What they can do is sell you that property for $300,000 and they hold back the entire value of the mortgage for you. In that case, they are probably going to want better terms. They probably want a good rate of return. Sometimes they can get a better return than they can get instead of investing in another type of investment. 

The advantage for you is you don’t have to qualify for the mortgage through a traditional lender. Now you would have to do some minimal type of qualifying. 

The owner will want to look at your credit score but they may not be as stringent as going to a bank.

How many more properties you have is also usually not a concern. 

So, private or seller financing is when the seller will finance a portion of the transaction or all of the transaction so that you can actually purchase the property from them.