Seller Financing

Seller financing is a financing where the seller loans funds to the buyer. It can only work obviously if the seller does not need all of the sales proceeds to buy their new home. Seller financing is one method buyers can use to circumvent having to pay for private mortgage insurance (PMI). If the buyer’s loan to value ratio (LTV) is greater than 80%, the buyer will be required to purchase PMI in order to get mortgage financing. As PMI is expensive and not tax deductible, buyers will often finance using either the 80-10-10 method or the 80-15-5. Seller financing can be sued to finance the second mortgage as opposed to a bank or mortgage company.

One downside to seller financing is that the term is generally short, usually less than 5 years. As such the buyer will have to refinance in a relatively short time. That said, seller financing has some benefits which can include avoiding PMI, better loan terms (less risk generally means lower rates), and lower loan fees (Loan fees are usually a percentage of the loan, as the buyer is borrowing less from the bank, the total fees are lower).

Wraparound financing is one method of seller financing commonly used in TIC’s. In wrap-around TIC financing, the owner of a given building will have a mortgage loan that pre-dates the formation of a TIC. The owner then sells the building to the TIC ownership group. The seller “lends” the funds to the TIC owners who then pay back their mortgage loan directly to the seller. The seller than uses a portion of the payments he/she receives to pay the original mortgage on the building.