Seller Financing: Major Risks & How to Avoid Them

by Michele Hohlfeld 01/30/2022

Seller financing is an excellent option for some property buyers and sellers. However, no matter the type of financing the seller offers, they are taking on a sizable amount of risk. Underwriting and supplementing a mortgage means dealing with the consequences if the buyer defaults on the loan. This is one reason many sellers hesitate to offer financing. However, there are some ways sellers can reduce the amount of risk involved and still make the sale.

Sellers Can Require a Loan Application

One way to mitigate risk in seller financing is to require the buyer to fill out a detailed loan application. This will give the seller all the information they need to determine whether to offer financing. Just like any application to another lender, the loan application should include a credit check, employment and personal references, financial information and anything else to help the seller get a full picture of the buyer’s situation.

Sellers Can Require Approval of Finances

Either in addition to or instead of requiring an application, sellers can make the sales contract contingent on the buyer having a satisfactory financial profile. The sales contract should include all the other aspects of the deal like loan amount, interest rates and length of term. By adding the additional financial approval requirement, sellers can avoid agreeing with a high-risk buyer.

Sellers Can Have the Loan Secured

Another way sellers can reduce their risk is by getting the loan secured to the home or property. This means that if the buyer defaults on the loan that the seller can foreclose on the property. To secure the loan this way, the seller should have an appraisal done to make sure the value is equal to or greater than the purchase price.

Sellers Can Require a Down Payment

Other financial institutions require down payments on loans, and sellers can as well. Not only do down payments give the lender or seller a safety net against risk, it gives the buyer an opportunity to commit to the purchase financially. A buyer who has put down a large down payment is far less likely to walk away from the deal. Just like other lenders, sellers should ask for at least 10% of the purchase price as a down payment.

Sellers Can Hire a Loan Servicing Company

If a seller needs help to handle all the paperwork involved in offering financing, they can hire professionals to help. A loan servicing company can assist with drawing up the mortgage, generating statements, communicating with the buyers, collecting payments and other administrative tasks. Besides helping to lighten the load, this further protects the seller from risk by having another party involved to check for errors.

Seller financing is uncommon because of the amount of risk. However, by using these strategies, sellers can protect themselves and benefit all sides of the home sale process.

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Michele Hohlfeld

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