Home Purchase with Seller Financing

Due to the demise of many marginal mortgage lenders, many feel that there would not be any possible way for them to fulfill the dream of home ownership. You may, however, explore a few other alternative ways. We recently discussed how you may explore the possibility of renting a home to buy. Today we discuss another possibility -- that of seeking financing from the seller so that he/she can carry the loan for a limited period of time.

It is possible to find such homeowners through Multiple Listing Service (MLS) but your own choices could be limited. So, do your homework first.

First step is to obtain your FICO credit score (read our past postings on 'credit') because you would want to show the potential seller that you are qualified. If your FICO score is under 670, try to clear that up to bring the score as much above that as possible. Remember, you need to do that anyway even if you were to obtain a loan from a conventional lender.

Next, have a look at your future income and ascertain how much of monthly payments you can make keeping your other payments aside (like car, credit card etc). It should never exceed one-third of your monthly income (more preferably, of your take-home income).

When you are armed with these two information, you are already a much better buyer and the seller could find more confidence in working with you. Still it would not be easy, so don't expect miracles to happen.

A home seller that would be willing to carry a loan generally would ask for slightly higher interest rate than what could be obtained from a conventional lender. On average, a seller may carry a loan for 5 years, amortized over 15 years. So, when the monthly payment is figured, it would appear as if the loan was to be for 15 years, but there would be a balloon payment at the end of 5th year when the loan is actually due to be paid in full.

So, no matter what, even if you manage to find a seller financing, start saving immediately to accumulate a down payment so that you can qualify to obtain a loan from a conventional lender.