Selling a house on terms is not a new concept. It became quite common in the 1970s and 1980s when mortgage interest rates rose drastically. At that time, this method of financing made it possible for those with less than perfect credit or not enough cash for a huge down payment to still be able to become homeowners. So how does this method work, and why would a homeowner choose to use it now? To answer this question, you need to understand what it means to sell on terms, and how a seller benefits from this process.
What Are Terms?
Also known as “seller financing” or “seller carry,” buying on terms involves paying over a period of time – a “term.” Basically, the homeowner becomes the lender – the bank – extending credit to the buyer for the equity on the home whether the home is owned free and clear, or if there is a mortgagee on the home. Both buyer and seller sign a Promissory Note and Performance Deed agreeing to the terms of the financing on the equity of the home.
Why Would a Seller Choose This Method?
There are several reasons this method of financing would appeal to a seller. One of the key reasons a seller would choose this method is that they stand to make more money this way. In some cases, where a homeowner owes more than the property is worth or has zero equity, this type of sale would make it so that they do not have to pay to sell their home when you factor in closings costs & agent commissions from a traditional listing on market. Other reasons include a much simpler and faster process and, much better tax implications. Owners with several properties especially, will realize tax benefits, in particular with capital gains tax.
Seller Pockets More Money
When selling a home through traditional methods, the seller racks up substantial commissions paid to realtors – which average anywhere from 5%-7% of the sales price, inspectors, repairs, appraisers, closing costs, – and the list goes on. Selling on terms eliminates most, if not all, of those additional costs. And, if facing capital gains tax, since the seller is not being paid a lump sum up front, they do not take a big hit on taxes. Any other items that could potentially cost a seller can easily be defined and agreed upon in the promissory note, so the seller can actually eliminate a good number of those as well.
When selling on terms, the purchase price will be agreed upon and an initial down payment will be made to the seller with interest figured on the remaining balance. Normally, a balloon payment will be due at the end of the contracted time period. After subtracting the balloon payment from the remaining balance, equal monthly payments will be calculated and paid to the seller.
So not only will the seller avoid multiple fees and other expenses, but they will also end up receiving close to market value for their home rather than having to settle for a low offer if listed traditionally.
Process is Simpler
If you have ever filled out a mortgage application, you know it can be complicated and extremely time-consuming. And that application is only one of many documents that a bank or other lending institutions require to just “pre-qualify” a buyer. In addition, a pre-qualification status does not even mean financing by that institution is guaranteed. A buyer could make an offer on a house that is accepted by the seller, only to have the lender refuse to actually issue the financing. Forcing the seller to start the long process of looking for a buyer again.
Selling a house on terms is a much simpler process in that the seller and buyer work out the terms together and sign a Promissory Note and Performance Deed, which will be filed at Title. The Promissory Note commits the seller and buyer to those terms with no middleman, no massive amount of paperwork and no heavy fees to bog down the process.
Process is Faster
Selling a house through conventional methods often takes three to 12 months from the time the house is listed. Before a seller can even list the property though, there are inspections and appraisals that must be scheduled and completed and, maintenance and repair issues to be addressed – all of which require time and money.
Selling on terms moves much more quickly than conventional methods of selling a house primarily because most, if not all, of these expensive and time-consuming tasks can be eliminated if the buyer and seller agree to those terms.
Another way to sell on terms is “Selling Subject to the Existing Mortgage.” Using this method, legal title to the property is transferred to the buyer but the mortgage remains in the seller’s name. There are two options for completing this process depending on the seller’s unique situation and circumstances.
- For sellers with no equity, we would simply take over the mortgage payments.
- For sellers with equity, we would take over the mortgage payments and then pay an agreed upon additional monthly amount directly to the homeowner.
The buyer contracts to pay the seller a monthly payment for the equity. We, as the buyer will be responsible for making the monthly mortgage payment (if there is one), any maintenance on the home, and, payment of taxes & insurance. This process can often be completed in 7-14 days, or as quickly as our Title Company can provide us with a clear Title Report.
Questions Most Sellers Ask
Q: What happens if you don’t make a payment?
A: We have a Performance Deed in place, meaning if we miss a payment the Deed will automatically go back in your name on day 31. However, our company will have invested time and money into the property to get it ready for the next occupant. So we make certain that all payments are made on time and, to ensure they are, we will have a loan servicing company in place. If you wish to receive a confirmation when each monthly payment is made, we can coordinate for that to happen as well.
Q: How will this affect my Debt to Income Ratio (DTI) if I want to buy a home in the future?
A: With our loan processing company in place, your loan will be a performing loan. Payments made on time with documentation from a Loan Processing Company, after six months 70% of that debt w ill be removed from your DTI. And, after 12 months, 100% of that debt will be removed completely from your DTI.
QHREI Can Help You Navigate the Process
In the Vancouver, WA area, Quality Homes Reimagined (QHREI) is a trusted resource for navigating the process of selling your home. Selling on terms is just one of the methods offered through QHREI, and our experts stand ready to assist you in navigating the process. Contact us today for a consultation.