What is Seller Financing?

When a seller allows a buyer to make payments over time for the purchase of property, it is known as owner financing or seller financing. This private financing by the seller can take the place of a bank loan or be in addition to a conventional mortgage.

The payment amount, interest rate, and other terms are agreed upon between the buyer and seller. The amount financed by the seller will depend upon the buyer’s down payment and whether there are any bank loans.

Here’s an example of how it works.

An owner advertises his or her house for sale, either on her own or through an agent.

A buyer makes an offer, and they agree upon a sales price of $175,000 with a 10 percent down payment of $17,500.

Rather than requiring the buyer to obtain a bank loan, the seller carries back the balance of $157,500 in the form of a note and mortgage. It could also be a note and deed of trust or a real estate contract, depending on the customary documents for that state. A title company or real estate attorney is often used for the closing.

The note spells out the terms of repayment. In this case they agree upon 8.5 percent interest at $1,211.04 per month based on a 360-month amortization. The seller doesn’t really want to wait a full 30 years for payments, so the note requires payment in full, known as a balloon payment, within seven years.

Because the buyer is making payments to the seller rather than an institutional lender, the legal arrangement is called a private mortgage, seller carry-back, installment sale, or owner financing.

The seller has the same mortgage rights as a bank, so if the buyer does not make payments, the seller can foreclose and take the property back.

When the seller prefers cash today rather than payments over time, the rights to future payments can be sold or assigned to a note investor on the secondary market.

Q: Am I Personally Liable to Pay on My Defaulted Mortgage?

A: The primary source of a mortgage lender’s recovery in the event the property owner defaults is the real

estate held as collateral, not the owner personally. To satisfy an unpaid mortgage debt, the lender is forced

to first sell the secured property by completing one of two types of foreclosure sales to satisfy the amounts owed:

  • a judicial foreclosure; or
  • a nonjudicial foreclosure.

Occasionally, the fair market value (FMV) of the property is insufficient to satisfy the debt through bidding at the

foreclosure sale. If the high bid is less than the debt owed on the mortgage, the lender suffers a loss, called a deficiency.

However, to collect on a deficiency, the mortgage lender is very limited in California. The most common type of foreclosure action in California is nonjudicial. When a lender completes a nonjudicial foreclosure sale though a trustee’s sale, they are barred from recovering their loss on the mortgage, except for intentional waste to the secured property.

Further, California has established anti-deficiency laws which bar lenders from collecting losses due to any type

of foreclosure sale on a nonrecourse debt, also called purchase-money debt.

Nonrecourse debt includes:

  • purchase-assist financing secured by a one-to-four unit residential property occupied by the buyer;
  • carryback seller financing evidencing the installment sale of any type of property which becomes the sole security for the debt; and
  • refinanced purchase-money mortgages, to the extent the funding is applied to discharge the purchase-money mortgage (including fees and costs associated with the refinance transaction). Every other type of mortgage is a recourse debt. The homeowner with a recourse mortgage is personally responsible for the payment of the debt. Recourse debt includes:
  • business-purpose mortgages secured by any type of property; and
  • all mortgages secured by a:
  • second home;
  • property containing five or more residential units;
  • commercial property; and
  • one-to-four unit, owner-occupied residence when the mortgage is a home equity line of credit

(HELOC) to the extent funds were advanced for purposes other than the purchase, construction or remodel of the property.

When a recourse second mortgage is wiped out by the foreclosure sale of a first mortgage holder, the wiped-out

lender may pursue a money judgement against the property owner to recover the debt. The exception: mortgages insured by the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) are subject to government recovery of these unpaid mortgage debts and have recourse against the homeowner. However, the FHA and VA rarely pursue deficiency judgments, though they have legal authority to do so.

I am an investor and, although I hold a real estate sales associate license, I am acting as an investor. However, if you would be best served through the traditional listing process, I will be happy to assist you there, as well.

Ed Wojtowicz                BRE #: 01754533                       (951) 901-8153

What happens when I’m late on a mortgage payment?

A: The late charge provision in a mortgage calls
for an additional charge if your payment is not
received by your lender when due or within a grace
period.
The minimum grace period before a mortgage
encumbering a one-to-four unit, owner-occupied
residential property is delinquent is ten days after the
due date without receipt of the payment — even if no
agreed-to or a shorter grace period is stated.
If you fail to pay a late charge when demanded, it is not
a material breach of your mortgage. As a non-material
breach, the failure to pay a late charge alone is not
grounds for your lender to initiate foreclosure.
To be enforceable, the late charge may not be punitive
in amount, as in an effort to coerce timely payment.
The amount needs to be reasonably related to money
losses incurred by your lender due to the delinquency.
The late charge on any mortgage secured by an
owner-occupied single family residence (SFR) is
limited to the greater of:
• 6% of the delinquent principal and interest
installment; or
• $5.
Lenders give notice and make a demand for the late
charge by providing the borrower either:
• a billing statement or notice sent prior to each
payment’s due date stating the late charge
amount and the date on which it will be incurred;
or
• a written statement or notice of the late charge
amount sent concurrent with or within ten days
of mailing a notice to cure a delinquency.
For mortgages secured by a one-to-four unit principal
residence, the lender is not permitted to assess
more than one late charge per delinquent monthly
installment, no matter how many months the payment
remains delinquent. Additionally, the late charge may
only be charged on principal and interest payments,
not on impound amounts or unpaid late charges

Ed Wojtowicz, Sales Associate

CalBRE Lic# 01754533
Contact: 949-500-7869

Equity Plus Realty

Richard Cerda, Broker

CalBRE Lic# 00464898

Contact: (951) 323-6289

Avoid Foreclosure in Riverside County – (951) 901-8153

Avoid Foreclosure? What is right for you? (951) 901-8153.

• Loan balance is greater than today’s market value?
• Can’t meet monthly mortgage payment?
• Facing the possibility of foreclosure?
Short sale – is it the right thing to do?
• Want to move but market value has dropped leaving diminished equity?
• Loan modification?
• Refinance?
• Rent?

There is no way for a property owner to know everything that is available to avoid foreclosure. Banks are being encouraged to be more receptive to negotiating a short sale instead of foreclosing on a property.

What is foreclosure?

Most people purchase real estate by borrowing part of the purchase price from a bank, mortgage company or owner carry back.   Sometimes a homeowner needs to borrow money against the equity, known as an “equity loan.” Others may refinance the mortgage loan to combine it with a home equity loan. When a lender is involved, the lender has a lien against the real estate to secure repayment of the loan. Failure to make the payments due on the loan (defaults) the lender can initiate foreclosure . . . the lender can force a sale of the home to pay for the outstanding loan. Call (951) 901-8153.

What is a short sale?

When the mortgage is more than the current market value, the lender evaluates the owner’s ability to meet the monthly mortgage obligation. If it is apparent that the property owner cannot meet their obligation, the lender may negotiate with a prospective buyer to accept a purchase price lower than the current mortgage balance.

Yes, the rules have changed on this, as the property owner no longer needs to be in arrears on the mortgage. If you have been forced into lower earnings because of the economy – whether it is a cut in pay or taking a new job at lower wages – you may qualify for a short sale. Banks have been authorized to help with relocation expenses by offering “Cash for Keys” exchanges. Cash offerings can be any amount from a couple of hundred dollars to upwards of thousands of dollars. This offering is determined by the bank, taking into consideration the mortgage balance, current market value, condition, etc. There is another way. (951) 901-8153.

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