Seller financing in real estate is an alternative method of funding that is used to secure a home by a buyer without sufficient credit or a large enough down payment to qualify for a traditional mortgage. The seller of the home extends credit to the buyer using the home as collateral. If the buyer doesn’t make the payments on the home, the seller has the right to foreclose and regain possession of the home.

Length of Financing Terms

While most traditional mortgages are written with amortization terms of 15 to 30 years, seller financing terms are often much shorter. Generally, the seller will agree to finance a home over the course of 3-5 years. Once this period is complete, the buyer either has to pay the loan off using cash, or he has to obtain traditional financing. In some cases, such as when the seller can afford to accept payments from the buyer long-term, the seller may finance a large amount of the sale price.

Costs Associated with Seller Financing

Interest is usually collected by the seller in much the same way a mortgage company collects interest. In the case of seller financing, the interest rate is usually higher than what is commonly associated with a traditional mortgage. For this reason, the buyer usually doesn’t have much equity available in the property during the first few years of the seller financing term (depending on the down payment). Additionally, the seller will likely have to pay fees to record the mortgage or deed of trust with the appropriate authorities. These may be passed on to the buyer.

Types of Seller Financing

Lease options, assumable mortgages, land contracts, junior mortgages and all-inclusive mortgages are all types of seller financing. Each of these types has its own benefits and drawbacks. Regardless of the type of seller financing offered, it is important that the house is used to secure the loan.

Risks of Seller Financing

The big risk for seller financing is on the seller. If the buyer defaults on payments, then the seller typically has to go through a foreclosure process to get the property back. To mitigate the risk of default, the seller will want as large of a down payment as possible.