Seller's Guide to Financing Terms
To list your home for sale on the MLS, you will need to indicate the type of buyer financing you are willing to accept. Read on to learn about common real estate financing terms and find out what each one means.
Types of Financing:
- Traditional Financing:
All sellers should indicate they are willing to accept "Cash" and a "Conventional Loan". A conventional loan is the most common loan for buyers.
- Owner Financing:
This type of financing means you're willing to accept monthly payments from the buyer rather than one lump sum. If you're interested in accepting this type of financing, you should also check "Land Contract", "Lease Option" and "Seller May Carry". If you go this route, you will likely need to hire a real estate attorney to help you draft the promissory note and other necessary documents.
- Government-Backed Loans:
Sellers can typically work with FHA, VA and CalVet loans without involving a real estate attorney. FHA, VA and CalVet lenders tend to be more strict on inspections and can deny a loan or request a higher down payment from the buyer if the home is in need of repairs. Sellers are often willing to check these boxes, though a buyer relying on this loan type may have issues if your home is a fixer-upper.
What Each Financing Term Means:
- Assumable Loan:
An assumable loan means the buyer may take over ("assume") the home loan that the seller currently pays on the property. Assumable loans are uncommon and most sellers will not check this box.
- CalVet Loans:
CalVet loans are loans that are available to most military veterans who buy a home in California. Most CalVet loans have below market interest rates with low or no down payment requirements.
Cash means you are willing to accept all cash offers. All sellers should check this box!
- Conventional Loans:
Conventional loans are standard buyer loans that are issued by lenders, such as Bank of America and Wells Fargo. Definitely check this box.
Exchange means you are willing to trade your property for another property. Checking this box is rare, as most sellers want cash, not another property.
- FHA Loans:
FHA loans are insured by the Federal Housing Administration. This means that if the home buyer fails to repay the loan, the federal government pays the lender for any losses.
Because of the government’s insurance, lenders like Wells Fargo and Bank of America require a lower down payment than they would from a buyer seeking a conventional loan. A conventional loan often requires a 20% down payment, but an FHA loan only requires 3.5% down. These loans are also available to homebuyers with credit scores as low as 620.
The appraisal and underwriting process is more involved with FHA loans than with conventional loans, and it is typically more difficult for buyers to be approved for an FHA loan. Also, some condo buildings have difficulty getting FHA-approved because their CC&R’s contain restrictions that violate FHA laws.
As a result, some sellers, particularly those in areas where homes are selling quickly, are unwilling to entertain offers from FHA funded buyers.
- Land Contract:
A land contract is a form of seller financing, where the buyer purchases the property for an agreed-upon price and repays the seller in a series of loan installments. The buyer takes possession of the property, though the seller retains legal title until the buyer has paid the loan in full. Most sellers do not check this box.
- Lease Option:
A lease option means the seller is willing to lease the home, while giving the buyer an option to purchase it later at an agreed upon purchase price. Lease options are rare.
- Seller May Carry:
Seller may carry is a form of seller financing, where the buyer purchases the property for an agreed-upon price and repays the seller in a series of loan installments. The buyer takes possession of the property and (unlike the Land Contract, described above) title is transferred to the buyer up front. If the buyer defaults on the loan, the seller can record a "Quick Claim Deed" and have the title restored. Most sellers do not check this box, as they prefer cash, not a promissory note.
- Shared Equity:
Shared equity means two parties purchasing the same property can create their own equity interest. For example, the two parties might purchase the property with a 60/40 split of ownership and with only one party occupying the home. Shared equity is rare, but there is no harm in checking this box and accepting shared equity as a form of financing.
- VA Loans:
A VA loan is a special type of loan backed by the government and is only available to veterans of the US military and surviving relatives. The down payment required is usually 1-3% of the total loan amount, and the interest rates are generally lower relative to conventional loans.
Some sellers will not entertain offers with VA financing because they have to pay more in closing costs, the time frames for approval can be longer than for conventional loans, and sometimes VA loans do not appraise as well as FHA or conventional financing.
VA loans are not designed to finance fixer-uppers. All homes financed by VA loans must be move-in ready and in line with the VA’s Minimum Property Requirements (MPRs). MPRs can make sellers fear a home will not meet VA standards and a deal will fall through. Accordingly, some sellers (particularly those selling a fixer-upper) bypass VA purchase offers altogether.
Now that you understand all the various financing options, you can decide which types of financing you want to accept when you sell your property.
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