Seller financing is becoming more prevalent as home sellers bend over backwards to lure in purchasers. Homebuyers may be surprised to learn, however, that seller financing isn't always the perfect arrangement.

If you've been out shopping for homes, you've probably seen the "seller will finance" pitch. Aggressive home sellers are so eager to attract buyers that they're doing what many mortgage lenders won't: they're offering to finance the deal. Under the right circumstances, this strategy is a true win/win; you get your loan plus a new home, and the seller gets to convert his property investment into a mortgage investment. But the right circumstances don't always come along.

A mortgage loan solution that works

As a prospective homebuyer, you should take a moment to learn what seller financing can and can't do for you. On the plus side, seller financing can:

Expedite the time it takes to secure financing. Traditional mortgage loans and FHA loans are the alternatives to seller financing. The approval process for either alternative can drag out for weeks, because traditional lenders are too skittish these days for quick approvals, and FHA loans have always had notoriously long processing times. Seller financing can go much more quickly, because the seller is motivated to close the deal as quickly as possible or move on to other prospects.

Make it easier for you to get a home. If your credit qualifications aren't strong enough for regular financing, sellers may be willing to offer lease-to-own programs or other creative financing solutions.

Down payments and mortgage refinancing

Here's the other side of the story. For the record, seller financing cannot:

Help you when you have no mortgage down payment. Sellers typically ask for at least 20 percent of the purchase price as a mortgage down payment. If you don't have it, consider an FHA-insured mortgage instead, which only requires 3.5 percent as a mortgage down payment.

Get you the best deal. The best real estate bargains available right now are short sales and distressed properties. But the owners of these homes can't afford to offer you financing. People who can afford to enter into a financing deal aren't desperate; they're just getting aggressive about selling their property. Don't expect them to wheel-and-deal on the asking price, and then give you a loan, too.The pricing on your seller-financed loan may not be dirt cheap, either. Most sellers would probably prefer that you pay them off with a mortgage refinance sooner rather than later. For that reason, they aren't going to give you a rate so low that you'll hold onto it for 30 years. Many sellers will even require that you get a mortgage refinance within a certain timeframe.

Seller financing can be a good or a bad idea. It's your job to know which applies to you-before you start shopping.

Published on October 13, 2010