Financing Your House Sale

ARE YOU trying to sell your house or apartment but just cannot get of it? Then consider lowering your asking price rather than offering to lend some of the money to a buyer. So called seller financing should be your last resort.

Sellers typically make loans at rates as much as two percentage points below market rates. But you should not subsidize the buyer unless you cannot sell your house any other way. Most people do not have the time or skills to manage such an investment successfully.

Say that you decide to help provide the financing for the buyer of your house. Your first problem could be neglecting to do a thorough credit check on him or her. Although you might be planning to get tough the moment your buyer misses a payment, there is not much you can do.

You might figure you could threaten to foreclose that is, take back your house. just try it! Foreclosure can drag out for months. All the time, your debtor can enjoy the comforts of your old home and you cannot exactly expect him to treat the house with tender loving care during the whole nasty affair. Even the best referenced creditor can go belly up. Whatever you can do to make that option as unpleasant as possible for him or her will stand to your advantage. So demand a healthy down payment, at least 10% and preferably more. For an insolvent buyer, it is a lot less painful to walk away from a mortgage contract with nothing to lose but a good credit rating than to lose both his credit rating and, say, $10,000.

If you want to finance the sale of your house yourself, you can enlist help from officers at your bank or savings and loan association. For a fee of 1% to 2% of the loan amount, they will service the mortgage you give to a buyer. The banker will do a credit check on the prospective buyer, collect payments and handle a foreclosure if one becomes necessary. In addition, the bank or savings or loan will sell you insurance against default. Typically, the cost is $400 for a $40,000 loan.

Once a mortgage contract is signed between seller and buyer, it is usually too late to make adjustments. So a mortgage contract always should be drafted by a professional usually a lawyer to meet the specific needs of both buyer and seller. Real estate agents, who are often involved in arranging owner financing, generally use blank forms that are filled in by the buyer and seller and later checked by the agency's lawyer. If the contract turns out not to be what you want, too bad.

In many states, for example, if a mortgage contract does not say that the loan you give to the buyer of your house is nonassumable, it is legally considered to be assumable. Thus, by simply promising in writing to make a loan in these states, you have agreed to make it assumable.

If you ever need money before the note comes due, you will have to sell the loan to a mortgage banker for less than its face value. But you will get a better price if you arrange the loan at the outset through the Federal National Mortgage Association's Home Seller program. A Fannie Mae approved bank or savings institution processes your buyer's application. The fee, which is negotiable, is usually paid by the buyer. To get the names of participating lenders in your area, write to the Federal National Mortgage Association (3900 Wisconsin Avenue, NW, Washington, D.C. 20016).

One form of seller financing that some buyers find attractive is the so called balloon mortgage. With a balloon, repayment of a large part of the principal is deferred. So monthly payments are low until the loan period ends, when you, the lender, get one big payment. A common problem with giving the buyer a balloon mortgage is that it ties up your money until the note matures and he or she has to pay you back. But an arrangement known by the dismaying name of hypothecation allows you to negotiate a way around that grim obstacle to liquidity. Essentially you use the money owed you as collateral for a new but smaller loan that you get from a bank or savings and loan association. Then you can use the loan money to add to the down payment on your new house.

With hypothecation, you might well work out the figures so that the homebuyer's monthly payment to you will be exactly the same as what the bank asks you to pay on your smaller loan. Your buyer could send his or her check directly to your bank and, in one stroke, be paying an installment on both your loan and his or hers. In any case ask your bank or savings and loan about the possibility of using hypothecation.

If you are thinking of financing the sale of your own house, here is what you should do:

Get a lawyer to write all your contracts even if you use a real estate broker.

Cover in writing everything that could possibly happen.

Do a property credit check on the buyer.

Make sure you get a big enough down payment to keep your buyer from hightailing it.

And insure your loan.