Why would an owner refuse any offer in today’s market when homes are on the market for months or years at a time? Why would the term seller-financed mortgage cause fear and hardship to a seller faced with losing his home? The top reasons owners are refusing seller-financed mortgages are alienation clauses, common sense, insurance policy complications and fear of appraisal problems.
Word of mouth or previous experience will show many sellers the problems involved in handling loans or mortgages on their own. Seller financed mortgages or land contracts may cause more harm than good to sellers and buyers alike.
The Difference Between Land Contracts and Seller Financing
Land contracts and seller financing are the same thing. Years ago the phrase “land contract” was established to help buyers qualify for a home loan easily by allowing the seller to be the bank or mortgage company. This occurred when interest rates were sky high and qualifying for a loan was near impossible for many homeowners.
Problems arose when there was poor understanding of how to handle a land contract properly. Many sellers were sued by the banks and by the purchaser of the property. At first the whole concept of land contracts seemed to be an easy answer to helping both buyers and sellers in selling and buying homes.
When deals went sour, the use of “land contracts” was eliminated and more and more turned to banks that had become easier to deal with when applying for a loan. In the 1990’s again loans were tight and banks were turning away qualified buyers. So to rectify this problem, the new term “seller financed mortgages” was adopted with smarter escrow companies and experienced Realtors.
What caused such huge problems in earlier years with the “land contracts” had now been rectified with smarter Realtors who realized where their predecessors went wrong. They now knew how to protect their clients and covered all the side effects of such dealings, so they thought.
What is Alienation and Due on Sale Clause?
The top reason sellers are refusing offers for seller financed mortgages is due to the “alienation or due on sale clause” in their mortgage contracts. This clause states that if the owner or seller of the property ever transfers the home without the bank’s authorization, the bank has the right to call the entire note due and payable.
This is also the main reason “land contracts” failed years ago. Sellers and buyers had no knowledge of such a contingency and thus allowed the buyers to call the bank to check on the mortgage being current. The banks then realized the property had been transferred and realized they were losing lots of money. At this point the new clause was added to mortgage contracts called “alienation or due on sale clause.”
Insurance Policies Must Remain in Seller’s Name
The insurance policy must remain in the seller’s name due to the fact that all new policies must go to the mortgage company. Once the mortgage company received a new policy with the new buyer’s name on, the bank called the loan due and exercised their right in the “due on sale clause.”
Once the insurance policy stayed in the seller’s name, the owner or seller must accept responsibility for all losses and claims on the property. The owner or seller must claim that he was present when the destruction or accident occurred, thus causing further liability.
Common Sense in Offers for Seller Financing
Another reason for owners turning down a seller financing deal is pure common sense. If the buyer is offering a large down payment and large monthly payments, then why can’t the buyer qualify for a conventional type loan? Poor credit and high debts may cause the buyer to default on any type mortgage. It is imperative that the seller screen the buyer thoroughly before accepting any type of seller financing.
A $10,000 down payment will not cover legal fees to evict the tenant from the home. Even if escrow papers stipulate eviction procedures after 30 days, removal of the buyer may be very difficult. Having proper representation and knowledge of current mortgage rates may save future headaches in this type of transaction.
Fear of Appraisal Values in the Future
With prices falling and banks refusing more and more loans, it is quite possible that appraisals will not match sales prices next year or five years from now. The fear that the appraisal will not come in may cause many owners to refuse such offers which include seller financing as a contingency.
In seller financing contracts the seller or owner agrees to sell the home to the buyer for ever and never require refinancing of the property. The buyer however has the right to refinance at any given time. Should the buyer decide to refinance on his own to avoid a higher interest rate and payment, he may run into appraisal problems.