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Credit remains tight. Lending has returned to qualifications that mirror other recessed economic times. It is very difficult to qualify for a mortgage loan if you don’t have a 20% down payment and a good credit score, as in over 680. Here in Southern California that down payment amount eliminates many potential buyers.
So what do you do if you want to purchase a home and do not have a 20% down payment?
I am beginning to hear of the method that was utilized in the early 80’s when there was double-digit inflation – “seller financing”.
Here is how it works. The buyer and the seller agree on a payment schedule, with no bank involved. With this plan, the buyer can make a down payment for less than 20% and have no PMI (Private Mortgage Insurance) to pay. However, buyers will need to have a down payment. The down payment may be negotiable with the seller. But plan for at least 10% down. You may be able to negotiate the down payment amount.
Most of the time the seller will want a slightly higher interest rate than market interest rates, especially if you were turned down by a lender. The seller may be willing to carry the loan if the buyer will pay the price that the seller is asking. This should be an option only if the buyer is planning to keep the home for a substantial number of years. The seller needs to sell at a price closer to what they paid before market values declined. Sellers may be willing to offer lower rates if you agree to meet their price. This may or may not be a good deal if real estate prices stay low for a long period.
Generally seller financed deals expire in five to seven years. This means the buyer will start with a 30-year amortization but the loan will have a balloon payment after five to seven years. At that time, the buyer will need to refinance through a bank or sell the home.
If this is a route you pursue and can find a willing seller, be certain to work with a title insurance company to make sure the home is free of tax liens and claims. You can get that accomplished for a couple of hundred dollars. Also, be certain to get a certified appraisal and a home inspection. While all the costs may total $1,000, it is well worth it in the long run. You certainly do not want to get involved in purchasing a house with structural issues and/or an owner with claims against the house title. The transfer of the property could get hung up with tax liens, etc.
Be diligent it just might work out.
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