Seller financing is a method of buying/selling a home that does not involve banks and cash offers.
It is one of a few different methods of selling a house for homeowners that need a way to get out from under a property.
In a deal where the seller is financing a property, the seller and buyer agree on a price for the property that will ultimately be paid after a term.
Let’s say a house is worth $100,000. If the seller is desperate, they may agree to sell the house at $90,000 with a seller finance deal.
This type of situation would arise if they are no longer able to afford the home, giving the buyer leverage.
However, if this isn’t the case, then a buyer could actually offer 105% ($105,000) if the seller is willing to let them finance for a while.
The buyer would start paying monthly payments for let’s say 60 months, or 5 years.
Each payment would go towards the purchase price, but this allows the buyer to build up their credit and equity in the property so that it’d be more easy for them to acquire a loan from a bank, or another source.
If they are making payments of $450 per month for 60 months, then by the time the purchase period arrives, they’ve built about $27,000 in equity, dropping the purchase price to $78,000, which would allow them to more easily get a loan and not require private mortgage insurance (PMI).
With this method, the seller gets slightly more than they originally wanted, while giving the buyer time to build up credit and pay monthly until they can finally pay off the rest of the balance for the home, creating a win-win situation.