HELPING A BUYER WITH FINANCING

Helping a buyer with financing - or getting interim financing when you're buying and selling a house simultaneously - can be risky business. To avoid problems, it's important to understand how such arrangements work.

Seller Financing

Helping a buyer with financing is not a decision to be taken lightly. First of all, you must have sufficient equity and financial resources - which rules out this option for many sellers. But in slow markets with few qualified buyers, seller financing may be the only way to close a sale. Before you consider this option, ask yourself:

Do you have the money?
If you are going to be strapped for cash to buy your next home, lending money probably is an imprudent choice. Consult an accountant if you're unsure.

Will you make money?
If you can charge more interest on your loan than you would make in other investments, then this could be a wise move, especially if you are looking for taxable interest income.

Will it help you sell your house faster?
In slow markets, offering seller financing is an incentive that can put your house out in front of the pack.

Will it help you sell your house for a better price?
If your prospective buyer qualifies for a lesser loan amount but is motivated to buy your property, seller financing may close the deal at the price you want. One scenario would be to offer a 10 percent second mortgage that the buyer combines with a 10 percent down payment and an 80 percent loan from the bank.

Is the buyer able to put down a sizeable down payment?
More money down means more financial commitment to the deal, and less risk of default.

You're the Lender
If you decide to offer a seller financing, take it one step at a time:

Ask your lender for a copy of the Uniform Residential Loan Application.
Have your buyer fill out and provide you with the same documents a lender would ask for. You may want to consult an attorney or accountant to help you evaluate the loan application.

Decide on loan terms and options.
Base these on the current market.

Hire an attorney to draw up a loan agreement.
Unless you are an attorney or mortgage professional, it's best to have an expert handle this step in order to avoid legal trouble down the road.

Interim Financing
If you are buying a new house before your old home has sold, and you don't have adequate savings for the down payment, you may need to obtain interim financing. You can do this with a bridge loan (also called a swing loan).

Bridge loans are short-term loans that allow you to borrow against the equity in your current property at interest rates much higher than conventional loans. In most cases, you can expect to borrow 75 percent to 90 percent of the value of your current home, for a loan term of up to 180 days. Most lenders will renew bridge loans for up to a year, but that can be costly because interest rates on bridge loans are as much as four points higher than conventional loans. Shop around-but first check with your current lender, who may be willing to give you better terms.

TIP:
Interim financing can be risky in any market, but is especially so in a slow one. You are essentially paying double the norm: two mortgages, two homeowner's insurance policies, two sets of property taxes. This can add up to a substantial amount. And if your current home doesn't sell, you could end up having to rent it out for much less than the monthly mortgage, driving you further into debt.

SELLER FINANCING