Hmmm – you’re asking whether to finance a buyer whose credit isn’t good enough to get a loan from a bank. If the bank doesn’t trust the buyer to make payments on time, why should you?
I know that it’s tougher to qualify for a mortgage than it used to be, but there’s a good reason. Lenders have returned to prudence, after the wild party they threw in the days before the real estate bust. Now, buyers need (gasp) downpayments and lenders are (gasp) checking income and credit. This means fewer qualified buyers, for people hoping to sell their homes.
So when a potential buyer asks a seller, “Will you take a note for the downpayment?” or even, “Will you take a note for the entire mortgage?” sellers are tempted to say yes. A study by Realtors Property Resource for Bloomberg News found almost 53,000 homes in its database bought with seller financing in 2010, up 56 percent over 2008.
But believe me, you are taking a huge risk. If you give the buyers a mortgage or deed of trust, and they don’t pay, you have to foreclose — potentially, an expensive proposition. If you keep the deed and sell on a monthly-payment contract (if your state allows it), your bank might call in the whole loan. If you’re counting on the payments to cover your mortgage on a new house, and the buyer defaults, you’ll be in big trouble.
Many of these deals give the buyer a low monthly payment, with a large, final payment (called a balloon) due after five or seven years. Supposedly, this credit-poor buyer will be in good shape by then, and able to refinance. Real estate expert John Reed isn’t optimistic. “You think that, in the sweet by and by, something will get better for the buyer,” he says. “But maybe they’ll get worse.”
So, thumbs down on the deal. If you still want to go ahead, make the buyers fill in the same Uniform Residential Loan Application they’d need for a bank loan. Get credit reports, look at pay stubs and check with the buyer’s current and previous employers. Hire a lawyer to go over the contract. If the loan is faulty, you might not be able to get your property back if the seller defaults.
I hope I’ve scared you off. Professional investors do some seller financing, but it’s no place for amateurs like you and me.