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Last year, 15 percent more seller-financed transactions were processed in the United States than in 2011. More than 100,000 properties were sold this way, the highest number recorded since 2006.

So how does this growing property trend really work for home sellers?

The Seller Becomes the Lender

Home buyers typically receive financial assistance from bank and building societies. In a seller financing arrangement, the seller takes on this lending role. The home owner extends credit to the buyer. This is equivalent to the purchase price of the home minus the buyer’s down payment. The buyer and seller sign a promissory note which outlines the loan’s terms. Depending on the state, a mortgage or deed of trust is then lodged with the local public records authority. Over time, the buyer pays back the sum of the loan along with interest incurred.

Typical Seller Financing Terms

Traditional mortgages typically run for a 30-year period, but seller financing plans are much shorter arrangements. While they are usually amortized over 30 years, they typically feature a balloon payment in around five years. At this time, it’s predicted that the home will have increased in value or that the buyers’ financial situation will have improved enough to make refinancing with a traditional lender a viable option.

This short time period is practical for sellers as they don’t need to wait 30 years to see the loan paid off. With regular repayments coming in, sellers can afford to relocate to more affordable dwellings, like apartments for rent in Houston or other competitively priced markets. The shorter time period also reduces the seller’s risks.

The Best Times to Consider Seller Financing

Seller financing arrangements are best entered into once a seller’s mortgage is paid off. A seller may also consider such a plan if the buyer’s down payment will clear the mortgage.

If the seller has a significant mortgage, the seller’s own financial institution must agree to the seller financing arrangement. In a tight credit market, lenders are often unwilling to approve such deals.

Seller financing is also appealing in a slow real estate market. Once a property has been on the market for a couple of months, home owners are typically forced to lower their asking price. Seller financing can be a good way for sellers to receive their desired asking price over time.

Buyers are willing to pay more in exchange for the agreement’s many benefits, which include reduced loan and origination fees and more negotiable terms. The seller financing arrangement is also a great way for the almost 40 percent of Americans who can’t qualify for traditional bank financing to enter the property market. Seller financing can therefore increase the pool of potential buyers. These prospective buyers may also pay as much as nine percent interest for the privilege of owning a home.

Seller financing is also a good option for sellers seeking a quick closing time. Traditionally it takes six to eight weeks to close a house. The reduced paperwork of a seller-financed transaction can see these deals closing in as little as two weeks.

Reducing the Risks for Home Owners

In seller financing arrangements, sellers are at risk of buyers defaulting on their loans. Several measures can reduce this risk.

Sellers can insist buyers complete a loan application, much as they would if they were borrowing from a financial institution. A seller is within his rights to run a credit check, and assess the buyer’s employment, assets, and references to determine the buyer’s financial security.

Remember that the buyer’s down payment also reduces the risk of the buyer defaulting on the loan. With a significant stake in the property, buyers are unlikely to walk away from the sale. Sellers should request at least 10 percent of the purchase price up front.

It’s a good idea to secure the loan with the property. This ensures the seller can foreclose if the buyer fails to make his payments. It’s smart to appraise the home before its sale to ensure it’s worth at least as much as the purchase price.

The Role of Professionals

Consulting professionals through the seller financing process is one of the best ways to minimize the risks. Attorneys and real estate agents can help draw up the contract of sale, the promissory note, and other important papers.

A loan serving company can relieve the pressure of managing the loan. Such firms will draw up the mortgage, inform buyers of the payment schedule, collect loan repayments, and perform other managerial tasks.

Reporting and paying taxes can also be difficult for sellers. A financial or tax expert can offer advice in this area to ensure sellers do not face fines.

Seller financing can be risky, but with the right terms in place it can offer real rewards for home sellers.