Yesterday the Wall Street Journal ran a great article about assumable mortgages: “A 3% Mortgage Rate in a 7% World? This Startup Says It Can Do That,” but they only told half the story. To get the most out of a real estate transaction, sellers need to consider the magic of combining seller financing with assumable mortgages. But what are these things and why do they matter? Read on and find out!
When it comes to real estate transactions, creativity and flexibility can make all the difference. One such creative financing strategy is the use of seller financing with assumable mortgages. This powerful combination allows buyers and sellers to navigate the real estate market in unique and advantageous ways. In this blog post, we’ll explore what seller financing and assumable mortgages are, and why combining them can be a winning strategy for both parties involved.
Understanding Seller Financing
Seller financing, also known as owner financing or seller carryback financing, is a real estate arrangement where the seller of a property acts as the lender, providing financing to the buyer. In other words, instead of the buyer obtaining a traditional mortgage loan from a bank, they make payments directly to the seller over an agreed-upon period. Though not as well known, seller financing has been in use for many years.
The Advantages of Seller Financing for Buyers:
- Easier Qualification: Seller financing can be an excellent option for buyers who may not meet the stringent requirements of traditional lenders. Sellers can be more flexible in assessing a buyer’s creditworthiness and income.
- Faster Transactions: Without the need for a lengthy loan approval process from a bank, transactions can close more quickly, often benefiting both parties.
- Negotiable Terms: Buyers and sellers have the freedom to negotiate the terms of the financing agreement, including the interest rate, down payment, and repayment schedule.
The Advantages of Seller Financing for Sellers:
- Higher Sale Price: Sellers can often command a higher sale price when offering financing, as it expands the pool of potential buyers. Some buyers may not qualify for all the financing they need from a traditional lender
- Steady Income Stream: Sellers receive regular payments, typically with interest, which can provide a consistent income stream. For example, if a seller charges 8% interest on a loan for 5 years, they will make 18% more money than just from the sale of the property itself.
- Attractive Investment: Seller financing can be an attractive investment option for those seeking a better return on their capital than what traditional investments might offer.
Understanding Assumable Mortgages
An assumable mortgage is a mortgage loan that allows a buyer to take over the existing mortgage of the seller. In this scenario, the buyer assumes responsibility for the remaining mortgage balance, interest rate, and terms. Essentially, the buyer steps into the seller’s shoes concerning the mortgage. Most FHA and VA loans, for example, are assumable.
The Advantages of Assumable Mortgages for Buyers:
- Tremendous savings: If the original mortgage has a low-interest rate, assuming it can be a significant advantage in a rising interest rate market. For example, the monthly payment on a $500,000, 30-year loan with a 7% interest rate is about $3,329. At a 3% interest rate that payment drops to $2,108. That’s a savings of $14,652 per year, every year, or up to $439,000 over the life of the loan!
- Savings on Closing Costs: Buyers may save on closing costs since they don’t need to obtain a new mortgage and pay related fees.
The Advantages of Assumable Mortgages for Sellers:
- Higher Sale Price: Let’s say a buyer has $125,000 to put down on a house, and the most they can afford is that $2,108 payment above. If they can assume a 3% mortgage, they could afford up to a $500,000 loan and (closing costs aside) afford to buy a $625,000 house. However, if they can only get a loan with a 7% interest rate, that $2,108 monthly payment doesn’t go nearly as far. At that rate and payment, their maximum loan amount would be about $316,979. That means with their $150,000 down payment, they could only afford to buy a house for, at most, $466,979. For the seller, that translates to $158,020 less in sale proceeds, or 24% less money from the sale of their house!
- Marketability: Properties with assumable mortgages may attract more potential buyers, increasing the likelihood of a sale. If some buyers have difficulty qualifying for a loan, or can only get a “non-qualifying mortgage” because they are self-employed, for example, it may take a lot longer to close the sale of your home. These kinds of buyers could find seller financing very attractive.
Combining Seller Financing with Assumable Mortgages: A Winning Strategy
Now, let’s explore the benefits of combining seller financing with assumable mortgages:
- Expanded Buyer Pool: By offering both seller financing and an assumable mortgage, sellers can cast a wider net and appeal to a diverse range of buyers, including those who might not qualify for traditional loans.
- Higher Sale Proceeds: In blending the cost savings from an assumable mortgage with the flexibility of seller financing, sellers can achieve a much higher sale price than they otherwise might.
- Negotiation Leverage: This strategy provides flexibility in negotiation, allowing both parties to tailor the financing terms and mortgage assumption process to their advantage.
- Competitive Advantage: In a competitive real estate market, properties with assumable mortgages and seller financing stand out and can command higher selling prices.
- Tax Benefits: Depending on the specific circumstances, sellers may enjoy potential tax benefits, such as deferring capital gains through structured financing.
- Smooth Transition: Buyers benefit from a seamless transition, assuming the favorable terms of the existing mortgage while benefiting from seller financing, which can be particularly attractive in a rising-rate environment.
Seller financing with assumable mortgages is a versatile and powerful strategy that benefits both buyers and sellers in the real estate market. It offers flexibility, attractive terms, and a competitive edge that can make all the difference in a transaction. Whether you’re a buyer looking for an alternative financing option or a seller seeking to enhance your property’s marketability, exploring this unique combination can be a win-win solution. When executed thoughtfully, seller financing with assumable mortgages can pave the way for successful and mutually beneficial real estate transactions.
ZimpleMoney is here to help! Our loan management and payment platform can make it easy for sellers and buyers to manage seller notes and automate repayments. We can help both parties take advantage of all of the benefits above, and get the transaction done quickly and easily. Contact us today to learn more!