Risks on both sides with deals financed by seller

For sale sign with sky in background

I’ve seen some signs lately that advertise homes for sale with seller-assisted financing.

Typically this means the property owner is willing to accept payments, much like a regular mortgage lender, for a period (usually about five years) and then expects a balloon payment at the end.

For some borrowers with less-than-perfect credit, seller financing might seem like a brilliant idea. They can skip the scary lender and still get the house they want regardless of their financial status.

Wrong.

Seller financing isn't common, but it does happen.

It's an option especially for sellers who don't need the money from a sale to finance their next property purchase. It's an option for buyers who might have a tough time securing a conventional mortgage.

However, there are risks for both the seller and the buyer.

First, the seller must ensure the buyer is creditworthy.

Always obtain a credit report and credit score for potential buyers. Anything below 620 puts the potential buyer in the lowest credit category, and you don't want to go there for any reason.

If your buyer has a credit score of 620 to 700, it's important to know why he or she has below-average credit. A buyer who defaulted on a couple of medical bills after an accident or illness is less of a risk than someone with a long history of not paying their credit card bills on time.

For the buyer, there are also risks.

While it may be nice to have an option outside of a typical mortgage lender, those who get the opportunity for seller financing may rush into the deal without proper knowledge of the process or preparedness for the lending requirements.

You might be able to afford to meet the monthly payment, but when it comes time for that large balloon payment, things can certainly get tricky. You'll likely have to make arrangements for bank financing.

But if you've already been turned down for a mortgage by a lender, you should sit back and figure out why. If it’s due to credit problems or financial capabilities, there is no guarantee a seller-financed deal will work out in your favor.

If you are considering a seller-financed scenario, hire a real estate attorney -- whether you’re the seller or the buyer. Obviously, you'll need to get everything in writing -- legally enforceable writing. Don't try to do it yourself.

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