Mortgage Loan or Seller Financing? Which is better?

Question

Hi,

I am learning more about seller financing at the moment.

In your opinion, is a mortgage loan or seller financing generally better?

In what cases or scenarios do you recommend using seller financing over getting a mortgage loan?

Darius Ogloza · Answer

The cost to close a seller financing should be much, much cheaper.  No appraisal, no lender's title insurance, no BS fees, no PMI, no impound accounts, no mostly nonsensical paperwork.  I would use seller financing 0 out of 10 times if I could.

Tyler Mutch · Answer

Hi Jimmy,

So I've recently come across this, and I am relatively new to REI. I have purchased two deals this year, and am running into a DTI (debt to income) issue on traditional financing, they are not counting the rental income until 2 years out. I have to shop around and find a new lender now, someone who can work with it. I'm telling you this because if you are looking to scale and you can get decent terms on a seller finance I would go that route, I believe it is something "not counted" on a lender's debt calculation. If you go that route you may be able to expand a little faster, even if it requires some more cash.

Randall Weatherall · Answer

@Jimmy Lieu

It's not a confusing question so much as one that doesn't have a set answer. It all depends on the terms that you negotiate with a seller.  The seller may want 15% down at 4% and the lender may want 10% at 6% or anything over, under, or in-between.  When you're going for seller-financing, you should keep in mind that it usually comes down to compromises like 'my price, your terms' or 'your price, my terms,' etc...  Without specific examples, there's no way to know which one is the better deal, right?

Avery Gilmer · Answer

@Jimmy Lieu yep, everything is negotiable. Once you figure out the sellers needs & wants it’ll be easier to negotiate all the terms. Some owners don’t need a big down payment & some do.. you just want to make sure the terms benefits both sides.

Randall Weatherall · Answer

The better one is the one that gets the deal done, right?

Seriously, though: it's up to the terms you negotiate on each one.  Seller financing is SO broad that it can consist of many different options, terms, etc... that a typical lender wouldn't consider and can usually end up being really beneficial to a buyer.  Sometimes, however, bank loans are the better choice if you have a lender that you work with that is willing to finagle a solid deal.

If you ever go the seller-finance route, make sure to add a clause for a much lower price that you can offer anytime for early payoff and every time you pay them, ask if they are ready to accept the full (much lower) amount and they may just bite.  There's an investor here I know that does that a lot and he's saved who-knows-how-much money over his 30+-year investment journey.

Tyler Mutch · Answer

@Darius Ogloza Great point, I hadn't even thought of that.

Jimmy Lieu · Answer

This is an amazing point. I feel like if you're negotiating with the seller and you're a few grand off, you can try seller financing to save on these fees and use the potential money you just saved (a few thousand) to provide a better offer. Thanks!

Darius Ogloza · Answer

I meant to say 10 out of 10.

Jimmy Lieu · Answer

Thanks so much Randall for your answer. Quick question since I'm still new to seller financing and etc. If I'm trying to preserve fiat as much as possible, would you say seller financing is a good option for this?

Obviously for mortgage loans you'll need a down payment. However, for seller financing, I will need a down payment most of the times as well. However, is there any way that you can use seller financing to preserve as much cash as possible in a way that would be better than using a mortgage loan?

Sorry, if it's a confusing question.

Mortgage Loan or Seller Financing? Which is better?

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