How to Write Up a Seller Financing Contract That Protects Your Interests
How to Write Up a Seller Financing Contract That Protects Your Interests
With the housing market continuing to grow, Seller financing has become a popular option for both buyers and sellers. Seller financing is beneficial for all parties involved because it creates an opportunity to close on a property without having to use traditional methods of funding such as bank loans or cash out-of-pocket. Seller financing contracts can be structured in many different ways depending on what works best for you and your situation.
This blog post will discuss these different types of seller financing contracts and what they should include ensuring your interest are covered.
The different types of seller financing contract
There are four types of seller financing contracts that you can use in your real estate transactions- the all-inclusive trust deed, Seller Carryback Loan Agreement, Land Contract, and Assumable Mortgage.
All-Inclusive Trust Deed
In an AITDThe seller's existing mortgage is retained. The buyer and seller agree on a price that reflects the seller's outstanding mortgage amount as well as their desired profit.
All of the provisions are set out in a promissory note. It is the seller's obligation to pay the lender as they receive payments so that the first mortgage remains current. Even if the buyer defaults, the seller is obligated to continue mortgage payments.
In a land contract or contract for deed, the buyer agrees to pay a specific price for the property. Payments are made over a period of time, and the seller holds a lien on the property until the deal is completed.
The buyer pays the price, less the down payment, plus a monthly interest rate to the seller over a specified number of years. After the final payment is made, the buyer receives the deed to the property and full ownership rights.
Seller Carryback Loan Agreement
Carry-back financing is a solution for borrowers who are unable to get complete financing. The seller serves as a lender, providing a second mortgage to make up the difference in the loan amount.
The seller receives the cash from the buyer's loan immediately but takes on the risk of the buyer defaulting on his or her the second loan.
If a borrower fails to pay, you have the ability to serve as a lender and foreclose. In most carry-backs, the buyer obtains 80% financing from the first mortgage with 10% down, while the seller covers the remaining 10%.
In some cases, a buyer might be able to assume the seller's mortgage payments. A transferable (or assumable) mortgage is when the outstanding balance on a mortgage and conditions of repayment are passed from the previous to the new owner.
If a buyer can't obtain full financing due to bad credit or because they're facing a higher interest rate, this option is appealing. The buyer may be required to make a down payment or take out another mortgage if the property's sale price exceeds the amount outstanding on the loan.
Not all mortgages are transferable. Loan standards, such as credit and income requirements, must be met by would-be purchasers.
Choosing the right seller financing contract for your transaction depends on the particular circumstances of your sale.
Whichever form you do choose, remember the contract must fulfill the legal requirements of your state. Seller financing contracts are not the same everywhere, so it's important to check with an attorney or legal professional in your area before starting negotiations
Include all the numbers
The seller financing contract is a financial document, therefore it must be detailed in discussing the financial terms—including how much the buyer owes and how they will repay it. The three significant figures to include are:
The agreed-upon sales price
The non-refundable deposit amount
The remaining loan balance
However, these aren't the only financial figures to consider while determining the monthly mortgage payment amount. The buyer will also have to pay interest on the loan and other expenses.
In a seller-financed transaction, a buyer's monthly payment must include expenses beyond the principal debt amount, such as interest, taxes, and other charges.
The terms of the loan must be included in the contract, such as how much monthly repayments, including interest, will be, and other monthly expenses—such as taxes and insurance.
You aren't a professional real estate agent or mortgage lender so you can charge your lender any interest rate they're willing to pay.
Because most buyers need seller financing due to their inability to obtain a conventional loan, it is expected that the interest rate on seller financing will be somewhat higher than average.
But don't go crazy with the interest rate, especially if you'll be taking advantage of tax benefits offered by seller financing.
The contract should also state who will take care of the city and state tax deductions.
Finally, the monthly payment amount should include any other outgoing expenses on the property throughout the term of the loan, such as taxes and insurance.
As a seller, you must ensure that you receive enough money each month from the monthly payment to cover taxes and insurance since you remain legally responsible for the home until the loan is paid off
All of this is documented in the contract, and it's crucial to get it straight. When all of these numbers that impact the buyer's debt amount are calculated, the contract should specify when and how frequently you'll be paid.
List all of the buyer responsibilities
In addition to making monthly payments, the buyer has a number of responsibilities that must be spelled out in the contract.
These obligations should include things like maintaining the property, making necessary repairs and fixing anything that's broken.
If the buyer fails to meet any of their responsibilities, they could be subject to legal action.
Include terms and consequences
Seller financing contracts are binding legal documents that should include terms and consequences for both parties.
The contract should state what will happen if either party fails to uphold their end of the bargain, including non-payment or failure to maintain the property.
The contract should also state that the seller has the right to take possession of the property if the buyer falls too far behind in payments or breaches any other terms of the agreement.
This gives you some security in case things go wrong and helps ensure the property will remain in good condition.
Consult with an attorney or legal professional
While it's possible for you to create a seller financing contract that meets the legal requirements of your state, it's always a good idea to have a professional look over it before signing.
An experienced real estate lawyer can help make sure the document is airtight and will protect your interests in case of any problems.
As you can see, Seller Financing Contracts are complex legal documents that require a lot of thought and consideration. You need to make sure you spell out all of the important details and terms in order to protect your interests.
If a Seller Financing Contract is not written up correctly, both parties could be subject to legal action that leaves them paying more than they expected or receiving less money from monthly repayments. So it is essential that you get it right at the beginning.
Looking to buy or sell a property? The Delphine Team can help! With years of experience in the real estate industry, we know what it takes to get the job done. Give us a call today and let us help you reach your goals!