A seller financing addendum outlines the terms under which the seller of a property agrees to loan money to the buyer in order to purchase their property.
Usually, an addendum is attached to the signed lease or purchase agreement and describes financing terms and property inspection requirements. Addendums are in frequent use within the real estate market.
Despite the advantages of seller financing, it can be risky for owners. For one, if the buyer defaults on the loan, the seller might have to face foreclosure. Because mortgages often come with clauses that require payment by a certain time, missing that date could be catastrophic.
Seller financing is championed by some property owners and real estate pros as a way to help home buyers qualify for additional mortgage opportunities, reduce the amount of red tape associated with home sales and improve profit margins on lending.
“Seller/Owner Will Carry” or “Seller/Owner Financing” is when the owner of the property is financing the loan for the buyer to purchase the property. This means the current owner of the home owes no money on the property and becomes the lender for the home's buyer.
The chief drawback for buyers lies in the higher interest incurred, and the shorter amount of time to pay the loan off. “The interest rate charged by a seller is usually much higher than a traditional mortgage lender would charge,” says McDermott.
For example, if the purchase price is $5,000,000 and the seller is willing to finance 50% of the purchase price, the buyer puts down $2,500,000 and makes monthly payments on the remainder until the remaining balance of the seller note is paid in full.
While a seller might not report payment activity to credit bureaus, negative marks still may end up on your credit report if you default on the seller-financed mortgage. If you fall behind on payments, the seller-lender may pursue a court judgment against you or may turn over your account to a debt collector.
The loan amount: If your seller is financing the full purchasing price of the home, the loan amount is the full price of the home minus whatever you put in the down payment. Otherwise, the loan amount is whatever the home seller and buyer have agreed upon.
The seller's financing typically runs only for a fairly short term, such as five years. At the end of that period, a balloon payment is due. The expectation is usually that the initial seller-financed purchase will improve the buyer's creditworthiness and allow them to accumulate equity in the home.
All elements of a seller carryback loan are negotiable, including interest rates, purchase price, down payment amount, and length of the loan. Sellers can set an interest rate that yields a fair profit. The average interest rates on seller carry notes range from around 5% to 15%.
FHA home loans require a down payment of 3.5% of the purchase price for home buyers with a credit score of 580 or above. Let's consider an example. If you're planning to buy a home for $250,000 and your score is at least 580, you'll need a $8,750 down payment.
An addendum is used to clarify and add things that were not initially part of the original contract or agreement. Think of addendums as additions to the original agreement (for example, adding a deadline where none existed in the original version).
The third-party financing addendum can protect the buyer and seller from potential loan issues. Even if someone is pre-approved for a loan, they might not be able to secure the amount they need to purchase the home.
Once a contract has been signed, it's usually difficult to amend that contract without adulterating it, which could render it null and void. Instead of writing a completely new contract, it's possible to use a contract addendum. With a contract addendum, you can add new clauses without nullifying the contract.
Owner financing is another name for seller financing. It is also called a purchase-money mortgage.
What Is Owner Financing? Owner financing—also known as seller financing—lets buyers pay for a new home without relying on a traditional mortgage. Instead, the homeowner (seller) finances the purchase, often at an interest rate higher than current mortgage rates and with a balloon payment due after at least five years.
Capital gains tax applies to the profit you make from the property sale. This tax applies whether the buyer has a conventional mortgage or you use seller financing.
Owner financing can be a good option for buyers who don't qualify for a traditional mortgage. For sellers, owner financing provides a faster way to close because buyers can skip the lengthy mortgage process.
Seller financing can be used to defer capital gains taxes on the sale of a business or property. Deferring your capital gains tax means that you don't have to pay taxes on the money you make from the sale until a later date. Typically, when a business is sold, the seller will pay taxes on the entire profit.
If they're not responding, or they come back with a not-so-great counteroffer, cut to the chase. Make your maximum offer immediately and put it in writing. Then, if they still don't respond, start looking elsewhere. If the sellers have a change of heart later, they'll know how to find you.
Seller financing means the seller agrees to receive a promissory note from the buyer for an unpaid portion of the purchase price. While less common in the middle market, seller financing does appear occasionally, but in far lower amounts (i.e. 5% to 10% of the total deal size).
Pros and cons of owner financing for sellers
You can sell the home as is — you don't need to meet a lender's appraisal requirements. Faster closing. With fewer due diligence requirements, you can complete the sale quickly. Positive investment return.
Known as mortgage originators, banks use their own funds to make the loan, but they can't risk eventually running out of money, so they often will sell the loan on the secondary market to replenish their available funds, so they can continue to offer financing to other customers.