If you are preparing to buy a home in Tacoma and the seller is offering financing, the offer may be tempting. Dealing with the bank is one of the most difficult and most stressful aspects of the homebuying process; so, if you can avoid all of the extra paperwork and red tape, why wouldn’t you take the opportunity to do so?
While seller financing can be a viable alternative to obtaining a traditional mortgage, seller financing presents its own legal, financial, and practical considerations. At the outset, it is important to note that seller financing is not a do-it-yourself (DIY) solution. When negotiating a seller financing agreement, both the buyer and the seller need to secure appropriate protection. And if you enter into a seller financing arrangement without the necessary legal terms in place, you may find that the costs far exceed what you would have incurred with a traditional lender.
10 Important Facts for Homebuyers Who Are Considering Seller Financing
What else do you need to know if you are considering seller financing? Here are 10 more important facts for you to keep in mind:
Important Fact #1: You Can Still Expect Your Lender (the Seller) to Ask for a Down Payment.
With seller financing, the seller is still likely to seek most (if not all) of the same protections as a lending institution. Among other things, this means that the seller will almost certainly require a down payment. Before making a down payment, you need to be certain that legal ownership will transfer to you at the time of closing. You do not want to find yourself in a situation where you have made a down payment but you do not legally own the home.
Important Fact #2: The Financial Terms of Your Seller Financing Arrangement Are Fully Negotiable.
With seller financing, the down payment, interest rate, and other financial terms of your loan are fully negotiable. Unlike banks, which are subject to strict underwriting guidelines, sellers are free to accept any terms they find agreeable. It is important to keep this in mind when negotiating the terms of sale.
Important Fact #3: The Seller Will Likely Still Require You to Maintain Adequate Insurance Coverage.
With the exception of title insurance, the seller is still likely to require you to maintain adequate insurance coverage for your home. Since the seller’s loan will be secured by the home, the seller will want to ensure that the value of the home will not be lost entirely in the event of a fire or other casualty event.
Important Fact #4: The Seller Will Likely Seek Other Financial Protections as Well.
In addition to obtaining a security interest in the home and requiring you to carry insurance, the seller will likely seek other financial protections as well. For example, the seller may require a credit check. And if you have a limited credit history or are a first-time homebuyer (or both), the seller may require a cosigner for the loan.
Important Fact #5: If You Default on Your Seller-Financed Loan, the Seller Will Be Able to Foreclose on Your Home.
Just like a bank, the seller will be able to foreclose on your home if you fail to make your monthly payments. Furthermore, since the seller may be relying on your monthly payments as a source of income, he or she may be less willing to wait to initiate foreclosure proceedings. If you enter into a Real Estate Contract, another form of seller financing, the lender can actually take back the property and retain all payments that have been made.
Important Fact #6: The Seller Must Deal with His or Her Lender Appropriately in Order to Sell You the Property.
When banks are involved in the sale process, the banks’ loan officers will generally work together to ensure that all of the necessary steps are completed. However, with seller financing, this will not be the case. If the seller does not deal with his or her lender appropriately (e.g., by providing notice of the sale and paying off his or her loan), then his or her lender may have the right to seek immediate payment or foreclose on the property.
Important Fact #7: Disputes with the Seller May Be More Likely to End Up in Court Than Disputes with a Bank.
One good thing about dealing with banks is that they are used to running into issues with homeowners, and they are often willing to negotiate resolutions when issues arise. However, if your seller needs you to pay on time in order to pay his or her own monthly expenses, this may mean that any disputes are more likely to end up in court.
Important Fact # 8: All of This Means That Seller Financing Still Requires Appropriate Documentation.
All of these mean that seller financing requires thorough documentation, just like obtaining a mortgage from a bank. While the number of documents you need to sign should be lower, you will still need to execute a comprehensive loan agreement that ensures appropriate legal protections for both parties.
Important Fact #9: The Seller Should Hire a Real Estate Attorney to Prepare and Negotiate the Terms of Your Financing Arrangement.
All of this also means that the seller should have a real estate attorney representing him or her with regard to the loan. As we mentioned above, seller financing is not a DIY proposition and the seller will need personalized legal advice to ensure that his or her interests are adequately protected.
Important Fact #10: In Order to Protect Yourself, You Will Need to Work with an Experienced Real Estate Attorney, Too.
In order to protect yourself, you will need to work with an experienced real estate attorney, too. While your real estate agent can help you negotiate the price and settle on a down payment, you will need an attorney to review the legal terms and negotiate any protections that are absent from the seller’s loan agreement.
Speak with a Real Estate Attorney at Blado Kiger Bolan, P.S.
Are you thinking about buying a home with seller financing in Tacoma, WA? If so, our real estate attorneys can ensure that your loan agreement provides you with adequate legal protections and remedies. To learn more in a confidential consultation, please call 253-272-2997 or contact us online today.