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Creative Financing Can Give Sellers an Edge
Seth A. Koch and Barbara Bellman are offering their Silver Spring home for sale or rent with an option to buy, a strategy designed to appeal to two audiences.
(By Mary Ellen Slayter -- The Washington Post)
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Brenda C. Small, managing broker of Prudential Carruthers Realtors in Chevy Chase and president of the Greater Capital Area Association of Realtors, said she doesn't expect to see many offers of seller financing, in part because there still are a lot of options available from lenders.
Another hindrance is unfamiliarity. "A very small percentage [of sellers] would be able to do that from a financial standpoint or a knowledge standpoint," she said.
However, Kevin Connelly, Arlington branch manager for BB&T Mortgage, said he thinks there is "renewed potential" for seller financing, in particular as a way to avoid the higher rates on jumbo loans above $417,000.
"Credit is still available, but guidelines are tighter and rates are higher," he said.
Even though the credit-market spasm of August has eased somewhat, rates on jumbo loans are still three-quarters to seven-eighths of a percentage point higher than on smaller loans that are eligible to be sold to Fannie Mae and Freddie Mac, which repackage them for the bond markets.
For example, Connelly said, say a house cost $521,200. The buyer could make a 5 percent down payment, $26,050, and take a conforming mortgage for $417,000. The seller could finance the remaining 15 percent of the sales price, $78,150.
That also avoids private mortgage insurance, required on most loans when the buyer makes a down payment of less than 20 percent.
Lenders have been offering these "piggyback" first- and second-lien combos for years. But a seller might be able to charge a little less interest than a lender would now, or be somewhat more tolerant of small credit blemishes.
Any such private financing must be done with the consent of the lender making that big first mortgage. A good loan officer will be able to advise you on how to structure it properly.
Sellers should insist that the buyers provide them all the same documentation given to the first-mortgage lender. That includes copies of their credit reports, loan applications and proof of income. The title company handling your closing can, for an extra fee, prepare the mortgage documents that give you a lien against the home. Keep in mind, though, your ability to get back an unpaid debt through foreclosure would be limited because you would be second in line, behind the holder of the first mortgage.
"It's a great tool to offer that may allow this property at least to be noticed," Connelly said.
Certainly, sellers these days welcome any edge they can find. But I think seller financing might be a better tool when used sparingly. Perhaps a buyer has enough cash to put 15 percent down. The seller might agree to lend the remaining 5 percent to reach that magic 20 percent level that negates the need to spend hundreds of dollars a month on private mortgage insurance. Offering such financing help could be a good alternative to lowering the price by a comparable amount.
E-mail Elizabeth Razzi atrazzie@washpost.com.
