Lower Buyer Closing Costs with Seller Financing

A recent survey by MortgageIT.com revealed that the average new homeowner paid closing costs in the neighborhood of $3500-$5500. If you could find an alternative means to finance your home and lower these costs, would you jump at it?

Mortgage Closing Costs by State - 2011

Despite today’s low interest rate environment, lower closing costs can provide strong incentive to use creative seller financing alternatives — benefiting both the buyer and the seller.

Closing costs can be difficult to tie down.  As a general rule, cost variables depend on the property location, local custom, type of transaction and/or financing, the parties’ negotiated agreement, time of year, housing market, and even one’s choice of realtor, title company, lender, and escrow agent.

Buyer Closing Costs

For buyers, the deal is the most attractive, which is one reason why owner financing with higher interest rates can prove desirable even in today’s housing market.

Normally an owner financed real estate purchase contract is more of a convenience to the buyer because the property doesn’t have to go through the appraisal process or be subject to the fees of a traditional lender.

Fees buyers may typically avoid with seller-financed contracts include:

• Credit report — up to $50
• Appraisal — $200-475
• Inspection — $150 – $500
• Mortgage Broker Origination Fee — $300 up to 2% of amount of loan
• Lender’s Fee — varies greatly, from $125 – $600
• Overhead Fees — $50 to several hundred dollars
• Loan Origination Fee (“Points”) — typically between 0.5%-2% of loan
• Lender’s Title Fee —$300 and up

To protect yourself as a home buyer, it’s still advisable for the to take some of the same safeguards as a bank, such as paying for an appraisal to ensure the purchase price reflects the value of the property.

It’s optional, but in the buyers best interest to always have an inspection made to check for structural damage whether you are buying with a traditional mortgage or owner financing.

Seller Closing Costs

For the seller, financing the purchase doesn’t provide the same savings in closing costs as for the buyer, but the deal can serve to attract more prospective home buyers than normal in this current housing market.

In most cases, owner-financed contracts give sellers the ability to charge higher interest rates, and this extra yield on mortgage payments may help compensate for any closing costs incurred at the time of the sale.

Fees sellers may typically incur with seller-financed contracts include:

• Excise tax on $100,000 (@1.78%) — $1,780
• Document recording fees — $20 and up
• Escrow or attorney fee — $300 – $600; higher in larger metropolitan areas
• Open collection escrow account — $64 – $100 set up fee
• Ongoing escrow collection fees — $2-8 per month

Often sellers are willing to carry financing for the contract, but don’t want to get into the business of collecting payments.  That’s why it’s common for sellers to open a collection escrow account to which payments are mailed.  This in turn provides interest and payment reports to both parties, as well as transferring the deed and paperwork to the buyer for recording.

A collection escrow account also sets up a procedural process in case you need to show proof that the buyer has been in default.

Perks for Both Parties

While the seller bears the brunt of closing costs, he does gain quite a few advantages. An Owner-financed real estate contract offers three attractive features:

1. Creative financing makes the deal happen.
2. Provides seller a higher rate of return for his cash than other safe investments.
3. Allows the seller to sell the property for asking price.

The seller-financed transaction is even better for the buyer. He may have to put down a significantly higher downpayment and pay somewhat higher interest rates, but saving money on closing costs can provide a powerful incentive for home buyers who may not normally qualify for a mortgage with a traditional lender.

If you are considering selling your home with owner financing, let us show you how to think outside of the box and get your home sold for more money and faster than most other homes.  Fill out the contact form below to arrange a free consultation.