Is seller financing right for me?
Seller financing can be complicated, so I recently asked my favorite lender, Megan Sovel, of Blue Oak Mortgage about the benefits of seller financing. In her usual gracious style, Megan explained seller financing for me and truthfully, there’s no reason to change up her explanation. 
Seller financing IS currently permitted on Conventional Financing, given the terms and borrower qualifications conform to all of the lender’s guidelines. In short, the benefit of seller financing in today’s market is that it allows the buyer/borrower to maximize their purchasing power by minimizing their down payment.
In the past, conventional second mortgages (Home Equity Line of Credit and Closed End Loans) were a popular and smart option for buyers who wanted to take advantage of a low down payment but still avoid the added expense and qualifying restrictions that come with Mortgage Insurance. As the market has turned, however, these purchase money seconds from conventional lenders have all but disappeared as the risk has far outweighed the lender’s returns on their investment. There are currently no banks giving second mortgages above 80% of the appraised value of the property (and in most cases they cap at 70% or 75%). That’s where seller financing can comes in as a huge buyer incentive.
Assuming the seller has the available equity and is willing to carry the Promissory Note for the borrower, Fannie Mae & Freddie Mac currently allow for a combined loan to value of up to 95% of the property’s appraised value. This means that the buyer could get an 80% loan to value first mortgage through a conventional lender, a 15% seller second mortgage, and contribute as little as 5% of their own funds toward down payment. This would allow the buyer to avoid Mortgage Insurance and, in some cases, possibly qualify for a Conventional loan (versus FHA) when they otherwise wouldn’t have (due to some pretty strict current Mortgage Insurance restrictions on credit score, debt to income ratios, reserves, etc).
Additionally, the seller financing can also help make up the difference between purchase price/appraised value, and a conforming loan amount ($417,000), which carry slightly lower rates and monthly payments than High Balance Conforming or Jumbo loans.
Now, that said, the terms of the seller financing will be have to be reviewed and approved by the first mortgage lender and pass all Fannie Mae & Freddie Mac guidelines for second mortgages. For instance, the seller’s financing cannot amortize (have a term) less than 5 years from the Note date, cannot have a Pre-Payment Penalty (“early termination fees are allowed permitting they don’t exceed $500), cannot allow for any negative amortization (the borrower must make at least Interest Only payments), and cannot exceed certain limitations on rates & fees. Furthermore, in addition to qualifying for the Conventional first mortgage, the borrower WILL have to qualify for the entire principal and interest payment on the seller’s note, and the lender may require an additional review of the appraisal in order to verify that the property value meets their minimum criteria.
All in all, seller financing has some huge benefits for potential buyers. While not many sellers have the luxury of offering that option to buyers in today’s market, it can be an extremely beneficial option for buyers looking to “think outside the box” of conventional mortgage financing.
Posted by: 
Martha O’Hayer
Contact Us
