Like honey draws bees, creative financing can draw buyers to your doorstep. Many home seekers are motivated to buy but need help meeting mortgage-qualification rules. You can help a prospective buyer finance the purchase of your house (and speed your sale) in several creative ways.
Seller takes back first trust.
You can lend the buyer the money, pocket the interest payments, and hold the mortgage on the property, as long as there is no current mortgage. The tax benefits are you may be able to pay income tax only on a percentage of the principal and interest that you get each year. You probably will want a 20% down payment (to discourage default on the loan), and you’ll need an attorney to draw up a deed of trust and promissory note.
Seller takes back second trust.
You can help fill the gap between other sources of financing and the sales price of the house. The second trust is usually for a smaller amount than a first trust but is riskier since it could be wiped out by defaulting on the first trust. Be sure to have your interests legally protected by your attorney.
On older mortgages, the buyer can sometimes take over the obligations of the existing mortgage at the stated interest rate for little or no additional cost. Often the seller takes back a second trust for the difference between the sales price and the balance of the old mortgage. If the sale is “subject to,” the seller remains liable for the old mortgage if the buyer defaults.
In this loan, which is a type of second trust, the seller retains the existing mortgage and makes regular payments on it. But the seller lends the buyer the total sales price less the down payment, often at an interest rate a little higher than the first mortgage rate, so the seller makes some profit. An additional risk for this second trust is if the loan is unassumable, the existing mortgage can be called by the lender.
While creative financing may not be as simple as traditional financing, in difficult market conditions a little sweetener can go a long way to attract the right buyer.
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