Some home sellers becoming lenders, too

CHICAGO — It's harder to get a mortgage today than it was a couple of years ago. That's why some home sellers are stepping in and financing deals on their own.

The concept of owner financing isn't new, but in today's tough real-estate markets, it can give a seller an edge.

"When you eliminate the hurdle of qualifying for a bank loan, you'll double the amount of buyers interested," said Dawn Rickabaugh, of Rickabaugh Realty, in Pasadena, Calif. She oversees the Web site NoteQueen.com, which focuses on owner financing.

Loans that are most difficult to get — including jumbo mortgages and financing for commercial properties — are ripe for seller carry-back scenarios, Rickabaugh said. But it can be done for any property type, and sellers can finance all or part of the loan, she said.

Seller financing can help buyers who may be having trouble getting a loan because they are self-employed or work on commission, for instance.

It can also help someone barred from a traditional mortgage due to scarred credit — if it can be explained, said Dorcas Helfant-Browning, principal broker and CEO of Coldwell Banker Professional, Realtors in Virginia Beach, Va.

Aside from the marketing incentive that owner financing provides, there are additional benefits for sellers.

In return for financing the mortgage, they receive a steady income stream from the mortgage payments; the interest could provide sellers with a welcome return, perhaps 7 percent or more.

"Many people carry paper intentionally. They can defer capital gains, and they create retirement income," Rickabaugh said.

But this type of deal isn't for everyone.

"It wouldn't be for someone who needs all of their money now to purchase their next home," said Russell Bean, a real-estate appraiser in Georgia and Alabama and a real-estate consultant who has experience with seller financing.

That said, the seller doesn't have to hold the mortgage forever; the paper can be sold on a secondary market, he added.

But if the buyer defaults on the loan while the seller is holding the paper, the seller may need to reclaim the property through foreclosure.

To protect themselves, sellers should ask for a sizable down payment from a buyer when they do this type of deal, said Bill Broadbent, co-author of "Owner Will Carry." He recommends no less than a 10 percent down payment.

Sellers need to work with a real-estate attorney to craft the terms of the deal, including what constitutes a late payment and default, or what happens if the buyer neglects to adequately insure the property, said Helfant-Browning.

Make sure the person you're working with has knowledge of this kind of transaction, Rickabaugh said. It's also wise to hire a loan servicer to collect payments and keep records, she added. Rickabaugh recommends SellerLoans.com. You can use peer-to-peer lenders such as VirginMoney.com, as well.

Buyers who go this route have to make sure they understand the terms of the contract; getting an attorney's eyes on the document will help.

It's also important to learn if there are any liens on the property before finalizing the sale, said David Lorti, of RE/MAX Elite in Tempe, Ariz.

And remember, just because seller financing is available doesn't mean a buyer should take it without exploring all other options. Buyers also should see what financing they could get through more traditional means, Lorti said.

"It behooves the buyer to be thinking 'What can I get on the open market?' as well," he said.