As a seller, you might think that financing falls squarely into the buyer’s list of responsibilities, and in most ways, it does. However, you still need to be aware of the three main types of financing and how they may affect your sale. Read on to learn more!
As a seller, this is the easiest and most straightforward type of buyer financing to deal with. Traditional financing occurs when a buyer either has cash to pay for your home outright or has taken out a conventional mortgage that they’ll use to pay for your home. At closing, the buyer hands you a check for the home, and if applicable, has their bank send money to your bank to cover any outstanding mortgage balance you carry.
Many buyers also use government-backed financing. Finance options such as VA (Department of Veteran’s Affairs) and FHA (Federal Housing Authority) loans fall into this category. Though these loans are backed by the government, they are funded through a traditional bank. This option can be beneficial to buyers because these types of loans typically have lower down payment requirements than conventional mortgages and are generally easier for people with less than perfect credit to obtain.
One major difference with government-backed loans is that lenders require additional assurance that the asset being backed is in good repair. For example, when a buyer takes out a VA or FHA loan, a home must meet “minimum property standards” as definied by the government agency backing the loan in order to be eligible for financing. If your home doesn’t meet these standards or if you live in a condo or townhome and your complex doesn’t have a stamp of approval from the VA or FHA, you may not be able to sell to government-backed buyers.
With this type of financing, the homeowner acts as the lender and the home buyer pays for the home in installments. Owner-backed financing can take a number of forms, and ideally, you should work with an attorney to draft up a contract that protects your financial interests.
If you decide to carry the loan, you can offer to carry it for 15 or 30 years, just as a bank does with a mortgage. Alternatively, you may offer to carry the loan for an introductory period of five years, for example. In this scenario, the seller pays you monthly for five years, and after that period, a balloon payment is due on the loan. At that point, the buyer must take out a mortgage from a bank and pay you the remainder of the amount due.
The type of financing you are willing and able to accept on your home sale can have a huge impact on the number of buyers who are able to buy your property, so make sure you include and understand all your options when you list.
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