Some important new tools are becoming available for S individual home sellers who want to help finance their prospective purchasers. But the word isn't getting out rapidly, in part because real estate brokers and attorneys aren't aware of recent changes in the mortgage market.
Seller-financing now accounts for half or more of all home resales in many metropolitan areas. Owners commonly provide first mortgages (or deeds of trust), second mortgages, and custom-crafted land contracts to enable purchasers to swing the deal.
Individual home sellers seldom get insurance protection against default by their buyers. And only infrequently are their loans being originated on standard documents that are acceptable in the so-called national "secondary market" -- a key step to turning their loans into hard cash quickly if they need it in a pinch.
The existence of standard documents and commercial insurance for home seller-financers "is probably the best-kept secret in residential real estate," says a prominent New York attorney. He conceded sheepishly that it was news to him, too.
Major private mortgage insurers such as AMIC (Raleigh, N.C.), Investors Mortgage (Boston), Verex (Madison, Wis.), and United Guaranty (Greensboro, N.C.) will insure individual sellers under policies similar to those used for years to protect banks and savings and loans from defaults by borrowers.
The largest private mortgage underwriter in the country -- MGIC of Milwaukee -- has been working on development of a seller-financing protection package. It's also experimenting with default insurance on land contracts in Michigan.
The key step to obtaining insurance protection is what realty brokers, attorneys and others advising home sellers often fail to suggest: the involvement of a professional lender who carries a "master policy" with one or more insurance firms.
The lender may be a mortgage banker, an S&L or a bank. Besides having regular business relationships with a mortgage insurance firm, the lender should also be qualified to deal with "Fannie Mae," the Federal National Mortgage Association.
The nation's largest purchaser of home mortgages (it owns about $50 billion worth), Fannie Mae provides local lenders standard forms on which to originate mortgages and deeds of trust. In addition to traditional loans made directly to home buyers by banks, Fannie Mae will also purchase first (and certain second) mortgages made by individual home sellers -- provided they're on the standard forms and meet the corporation's credit tests.
Put another way, Fannie Mae will provide hard, cold cash to a seller-financer who wants to dispose of the loan he made to his home buyer, but only if a local, professional lender was on the scene handling the paperwork from the beginning.
The loan can be as large as $107,000. It can carry almost any interest rate imaginable -- from single digit to 20 percent or more. It can have creative "adjustable-rate" terms built into it for the protection of the seller-financer, and graduated payment features designed to further assist the buyer.
It can also carry original down payment terms as low as 5 percent, although Fannie Mae requires private mortgage default insurance on any seller-financed loan where the home buyer's equity is less than 20 percent.
Sellers aren't hearing about the existence of this resource in part because it's relatively new and hasn't been publicized aggressively -- including among local lenders themselves.
As a result, the vast majority of seller-financed loans are still being handled the way they would have been decades ago: The seller's or buyer's attorneys use local mortgage forms to custom tailor each transaction, with terms and payment plans set specifically for the individuals involved. The customizing process often makes the loan "paper" nonstandard, and thus difficult to resell anywhere but in the immediate local market. It also rules out the possibility of default insurance for the seller of the house, even when such protection is essential.
If you're thinking of selling your home this year with financing assistance for prospective buyers, here's some practical advice:
First, ask your realty broker to check out the Fannie Mae seller-finance ("vendor loan") program to see if it could benefit you (Fannie Mae's address is 3900 Wisconsin Ave. NW, Washington 20016).
Second, ask your advisers to explore the costs and benefits of having a professional lender originate and service your loan using nationally standard forms. Even if you don't want to turn the loan into cash immediately or later on, you'll be equiped to sell to the secondary market if you need to.
Third, check into the possibility of getting private mortgage insurance to protect you against default. It could save thousands of dollars a year or two from now -- which is precisely why banks insist on it for traditional loans.