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Judy Paul | Realtor | Lake Lanier, GA

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Seller Financing Questions


  • What is an assumable mortgage?

    : It is a mortgage held by the seller that can be taken over by the buyer when a home is sold. Such loans are hard to find because most lenders stopped voluntarily writing them many years ago. Most new assumable loans today are adjustable rate mortgages.
    An assumable mortgage may be attractive if the interest rate on the existing loan is lower than the rate the buyer could otherwise get on a new mortgage, either because of current market conditions or the buyer's poor credit history.
    To determine whether to assume an old loan or apply for a new one, pay close attention to the possible assumption fee, usually one point, and other terms of assumption set forth in the existing loan. One plus: there are generally few closing costs with an assumable loan.
    While an assumable mortgage can speed up the property sale, sellers should be careful about letting a buyer assume their mortgage. Depending on the state and terms of the mortgage, a seller may remain liable for the loan until it is paid off in full. Or the lender may go after both the seller and the buyer if the loan is not paid.

  • What is seller financing?

    Also known as a purchase money mortgage, it is when the seller agrees to 'lend' money to the buyer to purchase and close on the seller's home. Usually sellers do this when money is tight, interest rates are high or when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.
    Seller financing differs from a traditional loan because the seller does not actually give the buyer cash to complete the purchase, as does the lender. Instead, it involves issuing a credit against the purchase price of the home. The buyer executes a promissory note or trust deed in the seller's favor.
    The seller may take back a second note or finance the entire purchase if he owns the home free and clear.
    The buyer makes a sizeable down payment and agrees to pay the seller directly every month.
    The interest rate on a purchase money note is negotiable, as are the other terms in a seller-financed transaction, and is generally influenced by current Treasury bill and certificate of deposit rates. The rate may be higher than those on conventional loans, and the length of the loan shorter, anywhere from five to 15 years.

  • What is a lease option?

    It is an agreement between a renter and a landlord in which the renter signs a lease with an option to purchase the property. The option only binds the seller; the tenant has a choice to make a purchase or not.
    Lease options are common among buyers who would like to own a home but do not have enough money for the down payment and closing costs. A lease option may also be attractive to tenants who are working to improve bad credit before approaching a lender for a home loan.
    Under this arrangement, the landlord agrees to give a renter an exclusive option to purchase the property. The option price is usually determined at the outset, but not always, and the agreement states when the purchase should take place.
    A portion of the rent is used to make the future down payment. Most lenders will accept the down payment if the rental payments exceed the market rent and a valid lease-purchase agreement is in effect.
    Before you opt to do a lease option, find out as much as possible about how they work. Have an attorney review any paperwork before you and the tenant sign on the dotted line.

  • In seller financing, how does the seller determine what rate to provide?

    The interest rate on a purchase money note is negotiable, as are the other terms in a seller-financed transaction. To get an idea about what to charge, sellers can check with a lender or mortgage broker to determine current mortgage rates on loans, including second mortgages. Most interest rates, however, are generally influenced by current Treasury bill and certificate of deposit rates.
    Because sellers, unlike conventional lenders, do not charge loan fees or points, seller-financed costs are generally less than those associated with conventional home loans.
    Understandably, most sellers are not open to making a loan for a lower return than could be invested at a more profitable rate of return elsewhere. So the interest rates they charge may be higher than those on conventional loans, and the length of the loan shorter, anywhere from five to 15 years.

  • How does refinancing work?

    With a refinancing, you pay off an old loan on your home and take out a new one, usually at a lower mortgage interest rate. To refinance, you will generally need to have equity in your home, a good credit rating, and steady income. You can borrow a percentage of the equity to cover remodeling costs, debt consolidate, and college tuition.
    When you refinance, you will incur all the closing costs that go along with getting a new mortgage. So unless you are doing extensive renovations and can get a mortgage interest rate at least two points below your current loan rate, you may want to select another financing option.

  • When is the best time to refinance?

    Many people flock to refinance while mortgage interest rates are low, particularly when rates are about two percentage points below their existing home loans.
    Other factors, like when to finance, will depend on how long you plan to hold on to your home and whether you have to pay considerable fees to refinance. It also will depend on how far along you are in paying off your current mortgage.
    If you expect to sell your home relatively soon, you are not likely to recoup the costs you incurred to refinance. And if you are more than halfway through paying your current mortgage, you probably will gain little by refinancing. However, if you are going to own your home for at least another five years, that is probably long enough to recoup any refinancing costs and realize real savings as a result of lowering your monthly payment.
    In fact, if it costs you nothing to refinance, you can gain even more. Many lenders will let you roll the costs of the refinancing into the new note and still reduce the amount of the monthly payment. Plus, there are no-cost refinancing deals available.
    Contact your lender, and its competitors, before you refinance.

  • Can I refinance a home loan more than once?

    You most certainly can. During the most recent refinancing boom, for example, many homeowners refinanced their home loans two or three times within relatively short periods of time because interest rates kept treading downward, making it extremely attractive to trade in one loan for another.
    Just remember that refinancing is basically like applying for a mortgage all over again. Also be aware that refinancing in today's market is more difficult to do based on tighter credit restrictions. Each time you refinance, you will still have to go through the application process, get a home appraisal, and likely incur closing costs. Also, if you have a pre-payment penalty clause in your present mortgage, you will have to pay that penalty if you refinance. So be certain that it is actually worth it for you to refinance.

  • Is it possible to refinance following a bankruptcy?

    It can be difficult to do after a bankruptcy, unless you are willing to pay very high interest rates and fees. However, if you are contemplating bankruptcy, first talk with your lender and explain your situation. If your mortgage payments are current, the lender may be accommodating and refinance your loan, thereby helping to ease your financial burden.

  • What is APR?

    The annual percentage rate, or APR, is an interest rate that differs from the loan rate. It is the actual yearly interest rate paid by the borrower, including the points charged to initiate the loan and other costs.
    The APR discloses the real cost of borrowing by adding on the points and by factoring in the assumption that they will be paid off incrementally over the life of the loan. The APR is usually about 0.5% higher than the loan rate and is commonly used to compare mortgage programs from different lenders.
    The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. The APR is usually found next to the mortgage rate in newspaper ads.

  • What is a loan-to-value ratio?

    The loan-to-value ratio, or LTV, is the loan amount expressed as a percent of either the purchase price or the appraised value of the property. It is an important factor considered by lenders before approving a mortgage.
    Lenders generally prefer a down payment of 20%, with an 80% LTV.

  • What about equity?

    It is the cash value of your property over and above what is owed on it, including mortgages, liens, and judgments.
    The amount of equity almost always grows in a home over the years, although the current economic slump and rampant depreciation has diminished equity for many homeowners.
    Generally speaking, you can borrow against the equity that builds up in your home and use it for any number of reasons, including home improvements and to pay for college costs. The current economic climate, however, has made home equity loans more difficult to come by. Equity is also is a source of income for you once the home is sold.
    Equity is also what makes seller financing possible. If you have money to spare, you can always lend some to the buyer and collect interest on it.

  • What is a second mortgage?

    It is a loan against the equity in your home. Financial institutions will generally let you borrow up to 80% of the appraised value of your home, minus the balance of your original mortgage.
    You may incur all the fees normally associated with a mortgage, including closing costs, title insurance, and processing fees.
    Home improvement loans are often written as second mortgages. And sometimes you can get a college tuition loan by using a second mortgage.
    In case of default, the loan is paid off from the proceeds of the sale of the property, after the first mortgage has been paid off first.

  • Is a home equity line of credit similar to a second mortgage?

    A home equity loan, like a second mortgage, lets you tap up to about 80% of the appraised value of your home, minus your current mortgage balance. But because it is set up as a line of credit, you will not be charged interest until you actually make a withdrawal against the loan, although you will be responsible for paying closing costs.
    The withdrawals can be made gradually as you begin to pay contractors and suppliers for handling your remodeling project.
    The interest rates on these loans are usually variable. Of particular importance: make sure you understand the terms of the loan. If, for example, your loan requires that you pay interest only for the life of the loan, you will have to pay back the full amount borrowed at the end of the loan period or risk losing your home.

  • What are the benefits of prepaying my mortgage?

    You get to save thousands of dollars and shave years off the life of your loan because the additional payments made toward your monthly principal basically constitutes a partial prepayment of your mortgage.
    Each mortgage has specific terms describing how and when prepayment may occur. Some lenders impose a penalty if you repay the loan too soon.
    The total savings potential also will depend on how long you plan to live in your home. If you expect to move in the near future, do not expect to reap savings as large as those gained by people who pay ahead of schedule until they own their home free and clear.

  • How can I protect my home from creditors?

    Check with your state. It may provide special protection through the filing of a homestead exemption, which exempts some or all of the value of your equity in the homestead-the home that you live in and the land on which it sits-from claims of unsecured creditors. Whether to file a homestead exemption will depend on your situation. Contact your county recorder's office for details.

  • If faced with foreclosure, what are my options?

    Talk with your lender immediately. The lender may be able to arrange a repayment plan or the temporary reduction or suspension of your payment, particularly if your income has dropped substantially or expenses have shot up beyond your control. You also may be able to refinance the debt or extend the term of your mortgage loan. In almost every case, you will likely be able to work out some kind of deal that will avert foreclosure.
    If you have mortgage insurance, the insurer may also be interested in helping you. The company can temporarily pay the mortgage until you get back on your feet and are able to repay their 'loan.'
    If your money problems are long term, the lender may suggest that you sell the property, which will allow you to avoid foreclosure and protect your credit record.
    As a last resort, you could consider a deed-in-lieu of foreclosure. This is where you voluntarily 'give back' your property to the lender. While this will not save your house, it is not as damaging to your credit rating as a foreclosure. Exhaust all other viable options before making a decision.

  • Can a home be sold for less than its mortgage?

    Becoming a more and more popular option for distressed homeowners, this process is called a 'short sale', which occurs when a lender agrees to write off the portion of a mortgage that is higher than the value of a home. But, usually, a buyer must be willing to purchase the property first.
    A short sale may be more complex if the loan has been sold in the secondary market. Then the lender will need permission from Freddie Mac or Fannie Mae, the two major secondary-market players.
    If the loan was a low-down payment mortgage with private mortgage insurance, the lender also will need to involve the mortgage insurance company that insured the low-down payment loan.
    The short sale can keep the homeowner from landing in bankruptcy or foreclosure, but you must be able to prove your financial hardship. And any remaining difference between your home's value and the balance on your mortgage is considered a forgiveness of debt, which may mean it is taxable income.

  • Will I be able to buy again after losing a home to foreclosure?

    It can happen. But a lot will depend on your circumstances and the mortgage interest rate you are willing to pay. Generally, most lenders will consider your request for a home loan two to four years after your foreclosure. Predatory lenders will issue a home mortgage in less time. But beware-they routinely charge high mortgage interest rates, fees, and penalties for this privilege.
    A quality lender will expect you to show that you have cleaned up your credit. Providing a reasonable explanation about the circumstances that led to the foreclosure - such as exuberant medical expenses-is also helpful.