Seller financing in real estate is a type of financing in which a property owner directly provides financing for a purchase, which precludes the need for a buyer to borrow money from a third-party lender.
Because buyers in a seller financing arrangement pay back money directly to the owner/seller, they are not required to provide a cash advance. Instead, buyers are provided with a line of credit to pay for the purchase of the property within a specified period of time.
Once signed , a promissory note or contract detailing the terms of the purchase ensures that the buyer cannot back out of the arrangement. Frequently, seller financing agreements involve a balloon payment, in which a portion of the debt owed on the purchase is made for a specified period of time. At the end of this time period, the buyer is required to pay the remaining balance in full.
Seller financing provides a viable alternative for borrowers who have bad credit and are unable to acquire financing at traditional lending institutions. The main beneficiary in this situation is the buyer, as the gains made by the seller are minimal compared to the time-value of receiving full payment from a mortgage company.