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Will You Finance? How to Answer This Question

Written By: David Reed
Friday, October 1, 2021

Okay so you recently listed your home and have begun to receive offers. So far, the offers have been lower than what you want so you decide to wait a little longer to see if the current list price is accepted. Pretty soon, not only did someone match your list price with their offer but also bumped it up a little bit. Thats hard to ignore, isnt it? But theres a caveat: the proposal asks that you finance the transaction. A >

The first thing to find out is why the potential buyers are wanting you to carry the note on the property. Many times its because the buyers have had their credit damaged and cant seem to find a competitive mortgage program. Before you get too much further, you need to ask the potential buyers why they need seller financing in the first place. If they tell you its due to their low credit scores, the next question is to ask why the scores are too low. If youre still interested in this full-price offer, youll next need to pull a credit report. Dont accept a credit report supplied by the buyers, instead get one of your own.

Low credit scores typically represent a marginal credit history over time. Some late payments, recent ones, are showing up on the credit report along with various late pays stretching out over the past couple of years. This clearly indicates a >

First, youll need a down payment. Not just 3 or 5, but one closer to 20 or even more. This reduces the risk at the outset and leaves you some equity in the transaction should you ever need to foreclose due to non-payment. Next, decide on what the terms of your personal note will be. A short term note of say two to three years is ideal because it gives the buyers time for their credit scores to repair to the point of being able to refinance into a conventional mortgage later on. And amortize your note over 30 years to lower the payments.

Finally, make sure they can afford your new terms. Use the same debt ratio that mortgage companies use. Including the property taxes and insurance, calculate the total monthly payment. This number should be around 30 of the buyers gross monthly income. Get copies of their paycheck stubs to make that comparison. If youve been satisfied, you should get with an attorney to put a legal note together.

If youve decided to say yes to this proposal, youve got some upfront cash to the tune of 20 of the sales price or more, youve gotten a full price offer plus a little more and you have some secured monthly income for the next two to three years.

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Francis Hoet - Agent with Douglas Elliman