Seller Financing vs. Bank Financing

They are more similar than you may realize.

Obtaining a mortgage loan from the banks is a difficult process due to numerous restrictions and requirements. For those trying to buy a home, this can mean a drawn out and tedious process. Fortunately there is an alternative that speeds up the sale while benefiting both the buyer and the seller. It’s called Seller Financing and is becoming a very common practice.

 

Task

See Explanation Below

Seller Financing

Bank Financing

Qualifying for a loan More lenient Strict
Interest Rate Typically a few points higher Set amount
Paperwork & Legal Documents SAME SAME
How payments are applied to loan SAME SAME
If the loan goes into default SAME SAME

 

Although the rules provide you with protections, it’s important to do your own analysis.  Focus on what loan amount is affordable for you, given your set of circumstances.  Take a good look at your income, expenses, and savings priorities to see what fits comfortably within your budget.

 

Qualifying for a loan

Basically, the seller is playing the role of the bank and therefore becomes the lender. The lender has to “Qualify” the buyer by reviewing income, debt and credit history to make sure the buyer is able to afford the home. However, unlike a bank, the lender can set his own guidelines. Although the same information has to be reviewed, the lender is able to allow a higher debt to income ratio or disregard credit history blemishes. The lender (as long as he is consistent with all the loans he makes) is able to look at the big picture and allow some imperfections.

Interest Rate

As an exchange, the loan is typically financed at a higher interest rate. The buyer is protected by regulation which set standards on the amount of interest the lender is able to set. Should the lender wish to maintain a level of protection, the lender cannot charge a penalty for paying off the loan early and can only finance a few interest rate percentage points above the average prime rate. The term on the loan depends on the sale but normally is similar to that of the banks. The lender also has to follow strict guidelines on how and when the property qualifies for acceleration and foreclosure.

Paperwork & Legal Documents

All documents, disclosures and anti-discrimination laws in a lender financed loan must be followed the same as a bank. Except for a few instances, a loan originator must be used. A loan originator for a lender financed loan would review and prepare the same information as a bank except follow the lender’s qualifying standards. The loan originator works for the lender to keep him in compliance with federal and state rules. Compensation for the loan originator can be paid by either party but not both.

Before both parties reach a deal, the lender needs to implement some security measures in case the buyer fails to hold up their end of the agreement. Normally, the collateral of the home being sold secures financing. However, other collateral such as real estate can be included.

How payments are applied to loan

The buyer has the same protection as a bank when it comes to how the lender services the loan. State and Federal regulation set standards on how and when monthly payments are applied to the loan.

If the loan goes into default

The Lender has to follow the same strict requirements as a bank should the loan go into default before foreclosure proceedings begin.