The Purchase Price
The seller and buyer's mutually agreed upon purchase
price for the property. As the seller, you should know
up-front that the buyer would like you to finance the
deal. Knowing that you will be financing the deal may
affect your willingness to make adjustments to the sales
price. |
The Down Payment
The size of the down payment may affect the buyers
commitment to honoring the mortgage contract. The larger
the down payment the buyer invests, the stronger his/her
motivation to protect the investment. In addition to
making the monthly payments, the buyer's commitment to
the investment would include a willingness to maintain
and upgrade the property, as well as make tax and
insurance payments. |
The Interest Rate
At a minimum, the interest rate you charge should match
current interest rates traditional mortgage lenders are
offering for loans of the same term. You may want to
charge an additional percentage point as compensation
for the work involved with servicing the loan. |
The Buyer's Credit &
Income
You'll want to review the buyer's credit history to
determine the buyer's willingness to pay his/her debts.
A credit report will give you a better understanding of
the buyer's financial history. Red flags would include
late payments and loan defaults. If a buyer has a less
than commendable credit history, you may decide not to
finance the loan or you may require a larger down
payment. In addition to the buyer's credit history,
you'll want to review the buyer's income sources. Is the
buyer's salary sufficient to make the monthly payments?
Does the buyer have additional income sources that could
be accessed if the buyer lost his/her job? |
Amortization
The amortization period is the length during which the
loan is repaid. The longer the amortization, the longer
you are at risk that the buyer will default on the loan.
|
Balloon Payment
A common practice is to have the full amount of the loan
due on a certain date, usually in 5 to 10 years. As the
lender, this gives you a profitable short-term
investment with the provision that your principal
investment will be recouped in just 5 to 10 years. |
The buyer is usually in a better
position to secure traditional financing after 5 to 10
years. Both the buyer's equity in the property and
record of timely mortgage payments can help the buyer
secure a loan to cover the balloon payment. |
Escrow for Tax and
Insurance
Lenders typically require borrowers to pay 1/12 of their
annual taxes and insurance costs as an escrow payment
due with each mortgage payment. Then, the lender makes
the borrower's annual tax and insurance payment. While
this adds time and hassle to the seller-financer, it
also protects you from the unfortunate situation of
having a buyer make his/her mortgage payments but not
tax and/or insurance payments. |
Lender's Title Insurance
A smart investment is a lender's title insurance policy.
The policy protects your lien on the property from being
defeated by a prior lien or other interest in the
property, which, if exercised, would wipe out your
security. Things that can affect your rights as the
seller-financer include marriage, divorce, death,
forgery, a judgment for money damages, a failure to pay
state or federal taxes, and more. Be sure to include the
cost for your lender's title insurance as one of the
buyer's closing costs. |
Closing the Sale
Both buyer and seller will be responsible for paying the
usual closing costs. You will also want the buyer to pay
all the costs associated with setting up the mortgage
financing. This would include the cost of having your
attorney create the mortgage note. |