Loan Term Variations with Seller Financing
In most cases, sellers would like the loan to be paid off as quickly as possible. They worry they won’t get paid, they worry the buyers will damage the property, and they find lots of other things to worry about. The sooner the contract is paid off the sooner they can stop worrying. If the sellers are older they worry the loan will not be paid before they die or suffer health problems.
Buyers would like to stretch out the loan as long as possible. Making the loan term shorter increases their payments. If there is a balloon payment, they worry they will not have the money when the time comes. If they are already stretched financially they may not be able to make the payments if the loan term is to short.
The reality is most mortages are paid off within seven years. Something happens during that time which causes the house to be sold and/or refinanced. The buyers may move, get a better job, get divorced or have some other life changing event. The result of that will be a new loan placed against the house and all the existing lenders paid off.
For that reason I think sellers who will only consider a short term loan are making a mistake. They would do better to be generous about the length of the loan and negotiate harder on the interest rate and/or the purchase price. That will be where the real money is made.
{ 2 comments… read them below or add one }
Is there an owner financed option where the owner stays on the title and wraps the loan so that he doesn’t have to pay off the house first before selling it. Is this advisable.?
The good and the bad of owner financing is that the buyer and seller can agree to whatever terms, conditions, restrictions they want. Conventional financing is a “one size fits all” kind of deal. That means owner financing provides ways to shift taxes, set payments to meet anticipated events, etc. For example, making the purchase price higher and the interest rate lower will make more of the payments capital gains and less interest income.
It is certainly possible to write the kind of agreement you describe. However, I think every conventional loan in the last ten years clearly states that the loan is due on sale. Will they notice? Will they Care? Who knows? What if your buyer wants out of the deal and deliberately tells them? From what I have heard over the years, the change in insurance is what usually notifies them.
My understanding is this is not illegal, but it almost certainly violates the loan agreement. You will have to decide if the potential consequences are worth the benefits. You would want to have your attorney check the language carefully, but a short term lease with an option to buy might do what you need with fewer potential issues.