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Should a seller finance the buyer's mortgage?

Posted by  on Jun 18, 2014
 

Q: My house has been on the market for a while, and a possible sale just fell through because the guy who wanted to buy the house could not get final approval for the loan. I'm thinking of financing the mortgage loan for him myself -- it would give him a break and save me possibly having to lower the price of my house. What do you think?

A: It is a big step. Besides having to create all the infrastructure that goes into making and administering a loan, you have to ask yourself why your prospective buyer was turned down for a mortgage. It probably comes down to one or more of three factors:

  1. Credit problems. Past financial problems cause mortgage lenders to look at a loan applicant as a higher risk, and you have to ask yourself why you should be comfortable with a buyer's troubled history, if that history was enough to scare off professional lenders.
  2. Insufficient income. New qualified mortgage standards require that loan payments not exceed 43 percent of pre-tax income. If a person cannot meet that standard, you have to question how they will keep up with the payments.
  3. Not enough for the down payment. With lenders increasingly insisting on 20 percent, it is tougher for would-be buyers to get into the market. This may be the one issue you could work around. A lower down payment does not impact future ability to pay, though it does impact the risk of the loan because there would be less of an equity cushion in the collateral.

In theory, it is possible that you could find a loan-servicing company to buy the loan from you after the house is sold. However, the same things that scared lenders away in the first place may also make the loan unattractive later on. In other words, financing a mortgage is a big responsibility, and one you might have to live with for a long while.



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