Seller financing in Texas can be a useful tool. It allows sellers to move a home faster and get a sizable return on the investment. Less qualified buyers may benefit from less stringent qualifying and down payment requirements, more flexible rates, and better loan terms on a home that otherwise might be out of reach.
Sellers willing to provide financing represent a small portion of all sellers. This is because seller financing is not without legal, financial, and logistical hurdles. However, a seller that takes the right precautions and seeks the assistance of a Real Estate Attorney can reduce the inherent risks.
Seller Financing in Texas: How it Works
The seller takes on the role of the lender or “bank” in seller financing. Instead of the bank giving cash to the buyer, the seller extends credit to the buyer for the purchase price of the home, minus any down payment the buyer has made.
The buyer and seller then execute typical mortgage transaction documents including a promissory note (containing the terms of the loan). In Texas they record a deed of trust in the county property records. The buyer then pays the seller according to the loan terms over time, typically with interest. Frequently seller financed loans are often short term — for example, amortized over a typical mortgage period of 15 or 30 years but with a balloon payment due in five years.
The idea behind the five-year balloon is that, within a few years, the home will have gained enough in value or the buyers’ financial situation will have improved enough that they can refinance with a traditional lender.
For the seller, the short time period is also practical. The average seller financer is not in the same position as a bank to wait 30 years for the loan to be paid off. Furthermore, few sellers want to the risk of offering credit for extended periods of time.
A seller is in the best position to offer a seller financing deal when the home is free and clear of a mortgage — that is, when the seller’s own mortgage is paid off or can, at least, be paid off using the buyer’s down payment. If the seller still has a sizable mortgage on the property, the seller’s existing lender must agree to the transaction. In a tight credit market, risk-averse lenders are rarely willing to take on that extra risk. If a Seller financer or buyer has questions about how the process can work for them, they should contact a Texas Real Estate Attorney.
Types of Seller Financing Arrangements in Texas
The following are a few of the most common types of seller financing. Seeking the assistance of a Texas Real Estate Attorney can reduce the risks associated with each type of seller financing.
All-Inclusive Mortgage in Texas
In an all-inclusive mortgage the seller carries the promissory note and mortgage for the entire balance of the home price, less any down payment.
Junior Mortgage in Texas
Given the risks associated with lending in todays credit market, lenders are often hesitant to finance more than 80% of a home’s value. To facilitate a transaction, sellers can potentially extend credit to buyers to make up the difference: The seller then could carry a second or “junior” mortgage for the balance of the purchase price, less any down payment. In second or junior mortgage scenario, the seller immediately gets the proceeds of the loan from the first mortgage from the buyer’s first mortgage lender. However, a second mortgage increases the seller’s risk in other ways.
Specifically, he or she accepts a lower priority should the borrower default. Therefore, in a foreclosure or repossession, the seller’s second, or junior, mortgage is paid only after the first mortgage lender is paid off and only if there are sufficient proceeds from the sale.
Assumable Mortgage in Texas
Assumable mortgages allow the buyer to take the seller’s place on the existing mortgage. The final two types of most commonly used seller financing involve significantly greater risks in Texas. Before a seller in Texas considers ANY of these options, they should contact a Real Estate Attorney at one of our offices in Houston, San Antonio, or Edinburg, Texas.
Land Contract or Contract for Deed
In this type of owner financing title does not pass to the buyer immediately. Rather, the buyer has “equitable title,” a temporarily shared ownership. The buyer makes payments to the seller under the contract, after the final payment, the buyer gets the deed.
Lease Option in Texas
The seller leases the property to the buyer for a contracted term, similar to a typical lease or rental – However, the seller also agrees in return for an upfront fee, to sell the property to the buyer within some specified time in the future, at agreed-upon terms (possibly including price). Some or all of the rental payments can be credited against the purchase price. Numerous variations exist on lease options.
-Written by Eric Days (Partner at Guerra