How are the rates set for seller financing?

Before we can discuss how the rates for seller financing are set we must first understand what seller financing is all about. In its basic form, seller financing is when a home seller aids the prospective buyer to finance a real estate transaction.

A seller can help to finance a real estate transaction by one of two ways. The first is taking back a second note and the second is financing the entire purchase if the seller owns the home. Usually sellers do this when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.

With seller financing, after the two parties (the buyer and the seller) have agreed on all the principles (don’t forget to seek the advice of your real estate agent and attorney before going ahead with this route to financing) then, and only then, should all the details be sorted out.

By details on the financing it is refereeing to how the seller is to finance the deal. In general seller financing differs from the traditional loan because the seller does not give the buyer cash to complete the purchase. This is what a normal lender does. Seller financing requires continuing a credit against the purchase price of the home while the buyer carries out a promissory note and trust deed in the sellers favor. These circumstances must be acceptable to the lender who makes the initial mortgage on the house.

The interest rate on an owner-carried loan is negotiable and it is wise to ask your realtor to check with a lender or mortgage broker to determine the current rate on institutional first, or second, loans. Although fear of default makes many sellers reluctant to take back a second mortgage, seller financing can bring a higher price plus complete the sale sooner in some situations.

Seller financing characteristically costs less than usual financing because sellers dont charge loan fees, or points, as they are known. The Interest rates on an owner-carried loan will also be influenced by current treasury bill and certificate of deposit rates and this should be looked at, as a seller should generally not be willing to carry a loan for a lower return than they would earn if their money were invested elsewhere.

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