How does seller financing work and is it a viable option when buying a mobile home here in Sarasota?
As we have discussed in previous blogs, obtaining outside lending for a mobile home on leased land is very difficult to do.
Many lending agencies have added additional requirements in order to lend. Some of these requirements are looking heavily at the age of the home, costly inspections that need to be completed, and further scrutiny done by the underwriters even after all this work is done.
So, what do you do if you want to purchase a mobile home on leased land but do not have enough cash to make the purchase outright?
In that case, you may want to think about the Seller financing the sale as an option.
SELLER FINANCING: How it works in the sale of mobile homes.
Seller financing is when the seller gives the buyer a mortgage, which can help both buyers and sellers.
Seller financing can be a useful tool in a restricted credit market. This allows sellers to move their property faster and obtain a return on their considerable investment. In return, buyers can benefit from less strict requirements for initial qualification and payment, more flexible rates, and better loan terms in a house that could otherwise be out of reach.
Sellers willing to assume the role of financial ones represent only a small fraction of all sellers – typically less than 10%. That is because the treatment is not exempt from legal, financial, and logistical obstacles. But by taking adequate precautions and with professional help, sellers can reduce inherent risks.
The mechanics of financing by the seller.
In the seller’s financing, this assumes the role of the lender. Instead of giving cash to the buyer, the seller gives the buyer enough credit for the purchase price of the mobile home (not counting the initial payment). The buyer and the seller sign a promissory note (which contains the loan conditions). They register a mortgage (or “trust writing” in some states) with the local public record authority. Then the buyer pays the loan over time, normally with interest.
These loans are usually in the short term, for example, amortized at 10 years but with a global payment that expires in five years. The theory is that, within a few years, the mobile home will have gained enough value or the financial situation of the buyers will have improved enough so that they can refinance with a traditional lender, or with cash.
With seller financing, you essentially have the Seller act as the bank or lending agency.
The Buyer will make an initial down payment to the Seller and then make monthly installment payments to them over a set period of time. Many Sellers are open to this as a selling option, as they understand that coming up with an all-cash payment for the full price of a home can often be difficult, especially now with everything that has been going on due to COVID-19.
If a Seller will agree to hold the note on the home, then they will be the lien holder on the title. Their name will be shown on the title once you make the purchase and have the title transferred into your name. When the lien is finally paid off, then their name will be removed as the lien holder, as you will now own the home outright. This is what is referred to when people ask, “do you have a clear title?”
Some Sellers will want to add interest on monthly installment payments, just like a bank, whereas others won’t.
In our experience, we have never seen any Seller enforcing any type of penalty for an early payoff, so, there is no need to worry about that!
If you default on the loan to the Seller, then they will have the ability to call their note due just like a bank. If the note is not paid in full, the Seller will take the property back over and resell it again.
Tips to reduce the risk for the seller.
Many sellers are reluctant to subscribe to a mortgage because they fear that the buyer does not meet their obligations (that is, do not pay loan payments). But the seller can take measures to reduce the risk of non -compliance. A good professional can help the seller to do the following:
Require a loan application. The seller must insist that the buyer fill out a loan application form and must thoroughly verify all the information that the buyer provides there. This includes a credit verification and the investigation of employment history, assets, financial claims, references, and other information and background documentation.
Allow the seller to approve the buyer’s finances. The written sales contract – which specifies the terms of the treatment together with the loan amount, the interest rate, and the term – must be conditioned to the approval of the buyer’s financial situation by the seller.
That the loan is guaranteed by the mobile home. The loan must be guaranteed by the property so that the seller (lender) can execute the mortgage if the buyer does not comply. The mobile home must be properly applied to confirm that its value is equal to or greater than the purchase price.
Get an initial payment. Institutional lenders ask for advances to cushion the risk of losing investment. It also gives the buyer participation in the property and makes it less likely to go to the first sign of financial problems. Sellers should do the same and collect at least 10% of the purchase price. Otherwise, in a soft and fall market, mortgage execution could leave the seller with a house that cannot be sold to cover all costs.
Although cash purchases are by far the preferred method of selling a mobile home, seller financing is very popular and we expect it to grow in popularity for sure over the next year.
This is Mark Kaiser with the Mobile Home Dealer and we help mobile home buyers and sellers get to a better place in life!