It's much harder to get a mortgage today than it was a couple of years ago. That's why some home sellers are stepping in and financing deals on their own.
The concept of owner financing isn't new, though it wasn't as popular when mortgage money was easier and cheaper to come by through traditional lenders. But in today's tough real-estate markets, being able to finance the sale of your home can give a seller an edge. "There are a lot of good buyers out there that can't get loans," says Dawn Rickabaugh, of Rickabaugh Realty, in Pasadena, Calif. "When you eliminate the hurdle of qualifying for a bank loan, you'll double the amount of buyers interested," she says. Ms. Rickabaugh also oversees the owner-financing Web site NoteQueen.com.
Loans that are most difficult to get -- including jumbo mortgages and financing for commercial properties -- are ripe for seller carry-back scenarios, Ms. Rickabaugh says. But it can be done for any property type, and sellers can finance all or part of the loan, she says.
Seller financing can help buyers who may be having trouble getting a loan because they are self-employed or work on commission. It also can help someone barred from a traditional mortgage due to scarred credit, if it can be explained, says Dorcas Helfant-Browning, a broker in Virginia Beach, Va.
Seller Benefits
Aside from the marketing incentive that owner financing provides, there are additional benefits to this strategy from a seller's perspective.
In return for financing the mortgage, sellers receive a steady income stream from the mortgage payments. And at a time when other investments are more volatile, the interest on these mortgages could provide sellers with a welcome return, perhaps 7% or more.
"Many people carry paper intentionally. They can defer capital gains, and they create retirement income," says Ms. Rickabaugh. Those who own a home free and clear, or have a lot of equity built up, may find this strategy particularly attractive.
But this type of deal isn't for everyone. "It wouldn't be for someone who needs all of their money now to purchase their next home," says Russell Bean, a consultant and real-estate appraiser in Georgia and Alabama. That said, the seller doesn't have to hold the mortgage forever, he adds. Even in this difficult credit market, good quality notes can be sold on a secondary market.
A Big Drawback
But if the buyer defaults on the loan while the seller is holding the paper, the seller may need to reclaim the property through foreclosure.
To protect themselves, sellers should ask for a sizable down payment from a buyer when they do this type of deal -- especially if the buyer has a weak credit score, says Bill Broadbent, author of the book "Owner Will Carry."
Accepting too small a down payment can be a huge mistake because the buyer has less of a stake in keeping the home, he says. He recommends at least 10% down.
Sellers need to work with a real-estate attorney to craft the terms of the deal, with details including what constitutes a late payment or default, and what happens if the buyer neglects to adequately insure the property, says Ms. Helfant-Browning. It's wise to hire a loan servicer to collect payments and keep records, says Ms. Rickabaugh. She recommends sellerloans.com. You can also use peer-to-peer lenders such as virginmoneyus.com.
Write to Amy Hoak at amy.hoak@dowjones.com
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