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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2008

How to Develop a Seller-Financing Plan

Brokers can realize future business from all parties in a seller-financed transaction

Mortgage brokers who work on seller-financing transactions can realize opportunities for future business with the buyers, the sellers and the real estate agents involved. One of the most-obvious opportunities involves helping sellers finance their next transaction and helping buyers create an exit plan. By providing insight that many accountants, real estate agents and attorneys lack, brokers can ensure their position in future deals.

Uncertainties about qualifying for the next loan often prevent sellers from offering financing for their property. If they believe they can’t get a new loan to buy their next house, they likely won't consider seller financing. In addition, buyers often wonder if they'll be able to refinance out of a seller-financed mortgage when they qualify for a traditional loan.

It is up to you, as a mortgage broker who understands the process, to evaluate the buyer, the seller and current underwriting guidelines to develop a plan that enables sellers to finance their next home and buyers to refinance when they're ready and qualified.

Your expertise and effort will benefit the buyers, sellers and real estate agents, which will serve to lay the groundwork for future business. You save a deal for the real estate agents and essentially prequalify the buyer and seller for the future loans they plan to use.

Evaluate the buyer

Buyers are usually more open to owner financing than sellers. Typically, they will be concerned about the interest rate and being able to refinance to a traditional loan as soon as possible, however.

First, identify the borrower’s reason for using owner financing. Some borrowers want a loan at a lower rate but fail to consider the costs of refinancing and the risk of higher rates in the future. Sometimes, a conventional or portfolio loan may be the best option for buyers.

Once you determine the buyer's need for seller financing, you can identify different options for downpayment, including using  equity from other properties the buyer owns. Often, the seller will require a minimum amount of money; you need to know if the buyers can put that amount down, even if they prefer to put down less.

You also must show borrowers how they can refinance their seller-financed loan or how they can buy or refinance a different property while they have the seller financing in place.

Review the following current underwriting guidelines for your buyers, based on their situation:

  • Refinancing land contracts: Fannie Mae determines the loan status based on the land contract's execution date. If the buyer executed the land contract within the past 12 months, the transaction will be a purchase. If it has been more than 12 months since the land contract's execution, it will be a refinance. Fannie Mae does not allow cash-out refinances and makes no changes for property type.

    Freddie Mac does not have seasoning requirements for refinancing a recorded land contract. If the land contract is not recorded, it will treat any transaction as a purchase. Freddie Mac allows cash-out refinances but requires six months' seasoning for investment properties.

  • Multiple properties: When buyers own multiple properties, Fannie Mae limits them to a maximum of 10 financed one- to four-unit properties. Freddie Mac limits borrowers with multiple properties to a maximum of four financed one- to four-unit properties.
  • Rental income: If buyers plan to turn an existing primary residence into a rental and use the rental income, Fannie Mae requires buyers to have 30-percent equity in the property. It also requires that the rental income is documented with a copy of the fully executed lease agreement, receipt of a security deposit from the tenant and deposit into the borrower’s account.

    Freddie Mac requires 12 months' principal, interest, taxes and insurance payment reserves.
  • Unreported mortgages: Refinances to pay off unreported, nonconstruction mortgages must have 12 months' seasoning and must be documented with 12 months of canceled checks.

Further, for nearly every situation, you must complete a verification-of-mortgage form. The escrow company will provide a copy of the financing documents and verify the payments, amount and terms.

When you understand the buyer's needs, you can then create a proposal for the seller. This should include an explanation of the buyer's need, the exit strategy and the financing terms.

Sell the seller on the idea

Sellers often object to seller financing because they think they can't get a loan to purchase another property. You can show sellers how their next loan will work. First, you must identify different downpayment options for the seller and compare the costs of different options.

Here are some options:

  • Sellers can use the buyer's downpayment as their downpayment on future financing.
  • They can use the interest rate they charge the buyer to offset the higher cost of making a lower downpayment.
  • They can use the buyer’s monthly payments to offset their own monthly mortgage payment, similar to receiving rental income on an investment property.

Also, advise sellers of the costs they would incur if they can't sell their property. These include taxes, insurance, loan interest, the opportunity cost of investing the equity or using it to pay down debt, and missing a good deal on the property.

Sellers can qualify for their new loan as if they have notes-receivable income. They provide a copy of the financing documents to verify the payment amount and the remaining term. The escrow company provides copies of the documents and verification of the buyer’s payments. Payments often must continue for more than three years at the time of their mortgage application. Extending the agreement if needed to meet this requirement is a possibility, too. Plus, buyers often welcome a small extension as long as they maintain the flexibility to prepay.

Develop relationships

Many lender account executives, customer-service representatives and underwriters do not know the specific requirements to refinance seller financing or to underwrite buyers who hold seller financing. You can help them and stand out from the crowd.

Locate each lender's applicable underwriting guidelines and ask experienced underwriters questions. You also must be diligent and monitor underwriting guidelines for changes that can impact your clients.

It takes little time to facilitate a seller-financing transaction. Most of your time will be spent working with buyers and sellers to show them how they can qualify for their next loan, thus setting the stage for future business.

 


 


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