Seller Financing
Sellers have the option of financing the sale of their home using the equity that they have in the property. In a slow market, this can be a strong incentive for Buyers to consider buying a home, especially if they have a foreclosure or bankruptcy in their past that makes it difficult for them to obtain traditional financing. Depending on their financial picture, and how much equity has been built up in the property, the Seller can finance part or all of the mortgage for the Buyer. If the Seller doesn't need to use that equity to finance another home, financing the sale of the property can be a wise and lucrative investment for them. However, it can also have pitfalls. Before entering contractually into a private mortgage agreement with the Buyer, a Seller should consult his/her attorney. It is also prudent to discuss it with a tax advisor.

Carrying Back a Second Mortgage
In a situation like this, the Buyer finances the majority of the loan with a traditional mortgage lender, and finances the remaining amount with the Seller, usually borrowing from the Seller's equity in the home. Typically the Buyer pays a somewhat higher interest rate on the loan financed by the Seller, as there is more risk to the Seller, involved in carrying a "junior" loan in second position. This can provide some investment benefits to the Seller, but is not generally a desireable position, unless the Seller really needs to sell the house and is willing to tie up and possibly risk part of his/her equity to get the house sold. As before, it is wise to review this with a lawyer and tax advisor before signing any contracts.

The Purchase Price
During the purchase contract negotiations, the Seller and Buyer mutually agree upon a purchase price for the property. The Seller should always know how the Buyer intends to finance their purchase of the property. If the Buyer proposes that the Seller provide financing, this may affect the way the Seller thinks about the final sales price.

The Down Payment
The amount of the Buyer's down payment directly relates to their commitment to honor the mortgage contract. The larger the down payment, the stronger the Buyer's motivation is to protect that investment. If you are a Buyer looking for private financing, the larger the down payment you offer, the more likely your offer is to be accepted. Generally speaking, most Sellers require large down payments (often between 25% - 50%) when providing private financing.

The Interest Rate
Sellers typically charge at least the current interest rates that traditional mortgage lenders are offering for loans of the same term. They may also charge an additional percentage point as compensation for the work involved with servicing the loan.

The Buyer's Credit & Income
Reviewing a Buyer's credit report gives Sellers a better understanding of the Buyer's financial history. Late payments and loan defaults are cause for concern. If a Buyer has a less than commendable credit history, a Seller may decide not to finance the loan or require a larger down payment. Before entering into a private financing agreement, a Seller will also want to review the Buyer's income sources to determine that the Buyer makes enough money to make their monthly payments and that they have sufficient reserves to make payments for several months should the Buyer lose their job.

Amortization
Buyer and Seller can agree to any period for repayment of the loan - from as little as a few months to as long as 30 or 40 years. This period is called the amortization period. Many private mortgages are set at 5-10 years with the understanding that the Buyer will either sell or refinance at the end of that time. The longer the amortization, the longer the Seller is at risk that the Buyer will default on the loan. If the Buyer defaults on the loan, the Seller has the right to foreclose upon the property if they are providing primary financing. If the Seller is providing secondary financing, they must work with the primary lender to foreclose on the property, and repayment of their loan comes after repayment of the loan in primary position.

Balloon Payment
It is common for Sellers to set the due date for the full amount of the loan within a 5 to 10 year period. As the lender, this gives the Seller a profitable short-term investment. However, to fully amortize the loan over that short period is often difficult for the Buyer, with payments too high for them to make easily. Consequently, many Sellers will offer less-than-fully-amortized payments, or even interest-only payments, with a "Balloon Payment" for the full amount allowable at the end of the loan period. The idea is that the Buyer will either sell the property at a profit and pay off the Seller at that time, or secure traditional financing. If the Buyer had difficulty getting financing originally, both the Buyer's equity in the property and a record of timely mortgage payments will help the Buyer secure a loan to cover the balloon payment.

Impound Accounts for Tax and Insurance
Traditional mortgage lenders usually require borrowers to pay 1/12 of the annual taxes and insurance due on the property with each monthly mortgage payment, and this amount is put in an "impound" or escrow account. The lender then takes responsibility for making the annual tax and insurance payment on the property. This obviously requires extra time and expense from the Seller-financer,  but it also protects their investment from the unfortunate situation of having a Buyer make their mortgage payments but not the all-important tax and insurance payments.

Lender's Title Insurance
Obtaining a lender's title insurance policy is a smart investment for the Seller-financer. This kind of policy protects the Seller's lien on the property from being defeated by other interests or prior liens on the property, which, if exercised, would wipe out the Seller's security. Such possibilities include marriage, divorce, death, forgery, a judgment for money damages, a failure to pay state or federal taxes, and more. Sellers typically add the lender's title insurance to the purchase contract as one of the Buyer's closing costs.

Close of Sale
Buyer and Seller are responsible for paying the usual closing costs. The Seller typically requires the Buyer to pay all the costs associated with obtaining financing, just as any traditional lender would. These costs will not include some of the typical fees associated with standard lending, such as appraisal and underwriter's fees, but should include others not common to traditional mortgage loans, such as the cost of having an attorney create the mortgage note.