Buying a home can be important milestone to achieve. However, in today’s market it isn’t always easy to just walk into a bank and get a loan. Lenders look at a variety of factors including credit score, credit history, and debt to income ratio, as well as ability to repay. If you do not meet the criteria to obtain a loan you may have the option to buy through seller financing.

What is Seller Financing?

Seller financing is exactly how it sounds.  The seller will opt to finance the purchase of the home for a buyer who may not qualify for a traditional loan. They act as the lender in which the buyer will make the payments, as agreed in the terms of the sale.

The Benefits of Buying Using Seller Financing

Purchasing a home through seller financing can be extremely beneficial for buyers with less than stellar credit ratings or minimal funds for a down payment. Sellers who are willing to finance a home purchase are generally more lenient in terms of credit ratings, allowing a buyer with fair to bad credit the ability to purchase a home. Sellers will also often opt for a lower down-payment or even a variation of down-payments to meet your needs. Where traditional lenders require a 10% to 20% down payment, sellers who finance generally require only a 1% to 3% down payment.

The Drawbacks of Buying Using Seller Financing

While buying a home directly from a seller is a more affordable option upfront, in the long run it can cost much more overall for the purchase of the home. When you buy through seller financing it can be at a much larger interest rate than traditional lenders. This can add tens of thousands to the total purchase of the home including interest. Another issue with seller financing is if there is a pre-existing mortgage on the property and the seller fails to make payments, the bank can foreclose on the home even if you live in it. This in turn would leave you without a home and with little recourse.  Most contracts will include clauses to avoid this issue, therefore it is imperative when buying a home through seller financing that you go through the contract with a lawyer.

Using Seller Financing Benefits and Minimizing Drawbacks

Many people are skeptical of buying through seller financing because of its drawbacks, but there is a way to utilize its benefits while minimizing the drawbacks. If you have no other option you can buy a home through seller financing so that you can reap the benefit of obtaining a home with minimal down payment funds and poor credit. Once you purchase the home through seller financing, you should work towards improving your credit to meet the requirements needed to qualify a traditional loan. You should also monitor your credit using tools such as MyFico.com and once you reach your credit goals you can apply for a traditional loan at a much lower interest rate which will reduce the overall cost spent on the home.

When considering buying a home through seller financing, you should research which options are best for you. While seller financing is a great choice for those who cannot obtain a traditional loan, it is not the best choice for someone who can get a traditional loan at a better rate. If seller financing is the only option, you can use this to build up to getting a traditional loan.

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Crystal Stannard earned a Master's Degree from AIU. She is passionate about learning, reading, writing, and teaching. She lives in Jackson, TN with her family.

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