The housing market has become so expensive that some sellers are offering to help pay their buyers’ expenses, including their mortgage.
The housing market in turn has responded by offering new ways to make homes more affordable — from home sellers advertising assumable mortgages to lenders allowing buyers to put as little as 1% down.
Homeowners are also turning to “seller financing” in yet another effort to lower financial barriers for prospective buyers.
Seller financing refers to a financial arrangement where the home buyer pays the home seller directly in installments, rather than using a mortgage from a bank or a lender. It’s similar to a mortgage because the buyer still has a monthly payment, but it doesn’t go to a loan servicer; they pay it straight to the homeowner.
“Owner or seller financing has always been around as a niche option for some types of properties that might be difficult to get a mortgage for, or some buyers who may not qualify for a traditional mortgage,” Chen Zhao, economics research lead at Redfin, told MarketWatch.
There is evidence that while seller financing is still rare, it’s growing in popularity. As of September 2023, just 1.11% of all U.S. active listings mentioned some type of private financing — that’s the highest share since January 2017, according to an analysis by Realtor.com. The September figure is the third-highest in Realtor.com’s series, which dates back to 2016.
(News Corp, owner of MarketWatch, also operates Realtor.com.)
“As of September 2023, the share of listings that mentioned private financing was only 1.11%, but it was the highest share in 6 years.”
High mortgage rates are prompting homeowners to seek creative ways to make homes affordable
A recent listing on Redfin stated that the current owner of a $3.1 million home near Lincoln Park in Chicago, Il. was offering “seller financing” to the next owner, by paying the monthly principal payments for three years.
Like a bank, the owner wanted to offer the buyer the chance to pay just the interest on the home, at 4%, rather than the current 30-year mortgage rate of 8%, until rates theoretically come down in three years. That puts the monthly payment at around $15,000, the listing stated, which includes the $7,700 in interest, as well as property taxes and homeowners insurance.
At the end of the three years — or sooner, if rates drop — the buyer can refinance into a conventional mortgage that they can use to pay off the home seller and begin making monthly payments to their loan servicer. The buyer can also pay cash at any point to buy the house.
The home has been off and on the market for “quite some time,” Dan Close, the Chicago-based listing agent with Redfin, told MarketWatch. “And when I was speaking to the seller and we were building a strategy to sell the home, he said, ‘What about seller financing?’”
The homeowner was keen on trying something new to try to sell the home. The home was built in the 1900s, and came into the owner’s family’s hands in the early 1990s. They had carried out an extensive renovation, and updated the home. After the owner inherited the home, he renovated it again, with a mind to sell it.
Close asked if the homeowner was aware of the risks that come with seller financing, which include the possibility of the buyer defaulting on the payments or even ghosting the homeowner, or deciding not to go through with the purchase after the first three years of reduced payments end. “He and I had a thorough conversation because it’s my job to make sure he’s fully informed and can really make an educated decision,” Close said.
Benefits and drawbacks of seller financing
Close’s Chicago listing is not the only one.
In Denver, Colo., the owner of an $862,000 home is also offering “seller financing” at a “rate as low as 5.5%.” In Spokane, Wash., a corner house worth $150,000 in a 55+ community was on the market with “owner financing” listed as an option to entice interested-but-financially-constrained buyers.
Gurbeer Singh Sangha, a Fresno, Calif.-based real-estate agent who has experience with seller financing, said the arrangement is more common with investors who are looking to buy land or multi-family units, or even commercial properties.
“It’s hard to find in single-family homes, because the average seller wants to get their money right away,” Sangha told MarketWatch.
Sangha, who has offered seller financing when he sold his property, said generally, the financing arrangement is handled by the listing agent.
Once a buyer agrees to purchase the home and expresses an interest in having the seller help with the financing, the buyer may have to go through a process similar to that of a mortgage application by providing a credit check, proof of income, and other financial background information.
The buyer will then have to sign a promissory note that will spell out the terms of the payment agreement, according to SmartAsset. The document will state the purchase price, interest rate, when the payments will be made by the buyer to the seller, consequences of the buyer defaulting, and other details.
In some cases, seller financing is being advertised as synonymous with “rent to own,” according to one listing of a Durham, N.C. home that recently went into contract. In Ruskin, Fla., one homeowner is also offering buyers an opportunity to rent and eventually own the property, by essentially acting as a bank. “Wait for interest rates to go down before you sign a 30-year mortgage. Why rent when you can own?” the listing states.
There are potential pros to seller financing in a real-estate market such as today’s where inventory is at a historic low and rates are at multi-decade highs. They include: Buyers can afford to rent or pay interest until they have the ability to own; they can save on closing costs; and they may not need to put any money down, if the seller is amenable.
“Interest has been very healthy, and certainly interest about this financing is almost always the first question we get,” Close, the Chicago agent, said. “It certainly draws more people to see the house.”
But in many ways, seller financing can be risky.
Zhao warned that even though seller financing may seem like a way to lower buyers’ monthly costs in the immediate future, they may inadvertently end up paying more in interest in the long run if they take into account the total expenses — fees, interest, etc. — that would be paid over the life of the loan.
“The rate associated with this type of borrowing would usually be higher than getting a loan from a traditional lender because [buyers] cannot benefit from the same factors that allow a traditional lender to offer lower fees,” Zhao said. Sellers, for instance, can’t offer the same terms as conventional or government-backed mortgages that are sold to government enterprises Fannie Mae and Freddie Mac.
“‘The rate associated with this type of borrowing would usually be higher than getting a loan from a traditional lender because individuals cannot benefit from the same factors that allow a traditional lender to offer lower fees.’”
So “the risk profile is likely higher,” she added.
Buyers considering such “seller financing” arrangements should also consider what would happen if the seller were to stop the financing arrangement. For instance, with Close’s Chicago listing, after three years, the buyer should be prepared for their monthly payment to increase and potentially become unaffordable. Buyers should be aware of the medium-term changes they may have to deal with.
In seller-financed transactions, buyers should also ask if the seller will hand over the title to the property to the buyer at closing — as with a traditional mortgage — or plans to hold on to it until the loan is repaid.
Buyers may also not have the same level of consumer protections that they would be entitled to if they purchased a home with a traditional mortgage.
Hence, says Zhao, “I don’t think of this as a good way to get around higher rates for buyers.”
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