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Will You Finance? How to Answer This Question

Written by Posted On Thursday, 16 September 2021 00:00

Okay so you recently listed your home and have begun to receive offers. So far, the offers have been lower than what you want so you decide to wait a little longer to see if the current list price is accepted. Pretty soon, not only did someone match your list price with their offer but also bumped it up a little bit. That’s hard to ignore, isn’t it? But there’s a caveat: the proposal asks that you finance the transaction. A classic ‘seller financed’ purchase. Should you?

The first thing to find out is why the potential buyers are wanting you to carry the note on the property. Many times it’s because the buyers have had their credit damaged and can’t seem to find a competitive mortgage program. Before you get too much further, you need to ask the potential buyers why they need seller financing in the first place. If they tell you it’s due to their low credit scores, the next question is to ask why the scores are too low. If you’re still interested in this full-price offer, you’ll next need to pull a credit report. Don’t accept a credit report supplied by the buyers, instead get one of your own.

Low credit scores typically represent a marginal credit history over time. Some late payments, recent ones, are showing up on the credit report along with various ‘late pays’ stretching out over the past couple of years. This clearly indicates a relatively low regard for credit. In this situation, it’s probably best to pass on this offer and wait for the next one. However, if the low scores are due to a recent catastrophic event that won’t likely occur again, you might want to dig a little further. For example, one of the borrowers was laid off six months ago and some payments were missed. However, the individual soon found a new job and the late payments stopped. Again, you might be getting closer to a decision.

First, you’ll need a down payment. Not just 3% or 5%, but one closer to 20% or even more. This reduces the risk at the outset and leaves you some equity in the transaction should you ever need to foreclose due to non-payment. Next, decide on what the terms of your personal note will be. A short term note of say two to three years is ideal because it gives the buyers time for their credit scores to repair to the point of being able to refinance into a conventional mortgage later on. And amortize your note over 30 years to lower the payments.

Finally, make sure they can afford your new terms. Use the same debt ratio that mortgage companies use. Including the property taxes and insurance, calculate the total monthly payment. This number should be around 30% of the buyers’ gross monthly income. Get copies of their paycheck stubs to make that comparison. If you’ve been satisfied, you should get with an attorney to put a legal note together.

If you’ve decided to say ‘yes’ to this proposal, you’ve got some upfront cash to the tune of 20% of the sales price or more, you’ve gotten a full price offer plus a little more and you have some secured monthly income for the next two to three years.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country.