Buyer qualification is key for a seller offering seller financing on their home sale. The drawback is if the buyer does not make their payments causing a default. The foreclosure process is time-consuming and expensive, so how does a seller mitigate that risk? They pre-qualify the buyer by asking for information regarding their income and credit-worthiness.
If the buyer has already been prequalified with a lending institution, then that risk should be negligible. If a buyer has not prequalified, then it is the seller’s responsibility to satisfy his/her/their due diligence.
It is important to note that a buyer who does not meet all of the pre-qualification criteria will not necessarily be a poor risk; it just means they don’t meet the guidelines for that lender.
When using a conventional mortgage lender, the buyer must prove they have a down payment and can afford the payments, and seller financing is no different. The buyers’ ratios of debt to income, interest rates and added closing costs may prevent them from qualifying for conventional financing even though they make enough money to cash flow the payments. This is when the seller must assess and use good judgment based on the credibility of the buyer.
These items should be requested to help determine the credit-worthiness and the cash flow position of a buyer:
- Buyers’ Credit Report
- Proof of employment
- Copy of most recent income statement from their employer
- Overview of monthly debt commitments
- Balance sheet and calculation of net worth
- Personal references
In addition, the buyers’ broker carries weight with the seller based on the knowledge they can provide about the individual buyers.
As stated above, it is the seller’s responsibility to verify buyer financial qualification but an experienced seller’s broker can provide invaluable assistance in reviewing the buyer’s financial qualifications.
The good news with seller financing is that the benefits for the seller include receiving more money for their home and even delayed taxation depending on their situation. Bottom line: seller financing can be extremely profitable and is worth considering.
If you have questions regarding this process, please give me a call and I will happily talk you through it.
Melinda Skogerson, Managing Real Estate Broker
(425) 444-4141
Next time: Multiple Listing Services: is your broker in the right one for your market?