Information provided by:
Loretta Tate
Real Estate Consultant
Keller Williams Utah Realtors
801.347.9436
Call me with any questions you may have.
A real estate attorney should ALWAYS be used in these transactions.
I specialize in Creative Financing and helping people with Bankruptcy|Bad or No Credit|Foreclosures get into a home of their own. I have a network of professionals that assist me in these transactions including a Lender, Credit Restoration Service and a Real Estate Attorney. What are you waiting for? Give me a call today!!
What is Creative aka Seller Financing?
When purchasing a home, traditional financing is NOT your only option. There are several options available. Creative Financing (aka Seller Financing) is similar to a traditional loan, however, the seller stays involved with the transaction throughout the term of the contract. Both the buyer and seller are bound by a contract and the seller can foreclose on the property due to non-payment. Before entering into any of these types of contracts you should always consult your Realtor and a real estate attorney.
Types of Creative Financing:
*All-Inclusive Trust Deed-A state-approved document used for security, usually in seller financing, where the financing is structured as a wraparound. A Wraparound Loan is one that encompasses one or more existing loans.
*Contract for Deed-A Contract for Deed is an installment contract. The seller retains legal title to the property as security. The buyer has equitable title. The seller delivers legal title to the buyer once the contract is paid in full.
*Lease Option-An agreement to lease a real estate with the option to buy it sometime in the future at an agreed price or price to be determined at the time of purchase. The Lessee is under no legal obligation to buy if they determine that doing so is not in their best interest.
*Seller Carryback-In Seller Carryback financing, the seller acts as the financer and carries a second lien on the subject property for the buyer. When a traditional lender will not approve the total amount of the purchase, this is sometimes necessary to get the transaction closed.
Creative Financing Q & A
How Does a Contract for Deed Affect the Buyer?
The buyer does not have to expend as much of his capital in this type of transaction. The down payment is considerably lower than a traditional loan.
The interest rate is usually higher on the remaining balance. The payments can also be higher depending on the duration of the contract and the amount of the balloon payment.
How Does a Contract for Deed Affect the Seller?
This benefits the seller in that it allows the distribution of the tax reports for capital gains during the sale over the amount of time that the contract is in existence rather than all in the year of the sale. This does not in any way change the entire amount of the capital gains report.
The seller retains the title and the deed. If there is a default, the property automatically reverts back to the seller. All of the payments made according to the contract are kept by the seller as well.
Considering your personal situation, a Contract for Deed may be an ideal arrangement for you. You should always discuss this with professionals who have knowledge in this area.
What is Equitable Title?
Equitable Title gives the buyer the right to live in the property as well as improve, rent or otherwise enjoy all the benefits of ownership. It cannot be used as collateral for a home equity loan unless the bank will lend against equitable interest.
Why Do a Seller Carryback and How Does It Work?
By offering a Seller Carryback, this makes your home available to more buyers and allow you to ask for an increased sales price. You will also earn interest in addition to the principal payment.
In a depressed market it may be the only way you can get your home to sell. The interest rate is negotiated by the buyer and seller with consideration made to the buyer's down payment and credit profile.
The structure and interest rate can vary based on the negotiation between the buyer and seller. The terms can either be set at an adjustable rate or fixed. Check with your lender to see if your loan will allow a Seller Carryback.
In the event of a foreclosure, the first mortgage will always be paid first.
When entering into negotiations with a buyer, the seller should always ask to see their credit report and loan approval documents.
What Is a Lease Option?
A lease option is a contract in which you are buying the right to purchase the home in the future, either at an agreed price or a price to be determined in the future. You have no legal obligation to purchase the property if you decide it is not in your best interest to do so.
Most Lease Options are written over a period of 2 years. This is generally the amount of time it takes to build credit or restore damaged credit.
The Lessee pays a down payment rather than a security deposit. This is non-refundable and can be used to lock the purchase price if agreed upon beforehand.
A portion of the payment is allocated toward the final purchase price. This portion of the payment is also non-refundable.
When you close on the purchase of the home the down payment and rent credits are applied so that the buyer does not have to come up with a down payment or closing costs at that time.
