If you have never heard of seller financing, you are not alone. In the Beehive State, this path is perhaps the least traveled as far as obtaining funds to buy a house goes.
Otherwise known as the house financing of last resort, seller financing is an option you should only consider when you can’t get a mortgage in Utah the traditional way. It is not famous for several reasons.
You Have to Shoulder Above-the-market Interest
The mechanics of buying a seller-financed house states that a financial institution has little to no involvement in the deal. It is the seller who will act as the lender.
Instead of receiving hundreds of dollars in a lump sum, you will sign a promissory note, a document containing the terms of the agreement, which will be notified to the local public records authority. The seller could sell the promissory note to an investor in the future to get paid by cash more quickly.
To make up for the risk of giving you the right to live in the house without paying the entire price of the property upfront, you will likely be charged with an interest rate above the market. Even if you are allowed to put down less money, you will likely overpay as a consequence of not qualifying for a mortgage.
You Risk Failing to Come Up with a Balloon Payment
No seller will agree to finance your purchase with the usual mortgage term of 15 or 30 years. A typical seller financing arrangement is only good for five years. It will be amortized like a regular home loan, but the rest of the principal is due after 60 months.
In other words, you are obliged to make a balloon payment to complete the purchase from the seller. By that time, your credit should be good enough to qualify for a traditional mortgage to access adequate funds, or else you will fail to keep your side of the bargain.
You Might No Longer Refund the Extra Money You Paid
Regardless of the agreed-upon seller financing arrangement, there is a good chance that you might no longer recover the cash you paid if you break any of the agreement’s terms.
Missing a couple of payments and failing to pull the trigger on the purchase on the date the seller expects you to pay the rest of what you owe are some of the grounds for losing your right to continue living and buy the property.
In all probability, the seller is not going to let you refund your down payment or the portion of your monthly payments that could be credited against the property’s cost.
Seller financing offers a shortcut to the complicated traditional mortgage qualification process, but do not consider it as an instant ticket to home ownership. Any arrangement has its pitfalls, so think hard before you take this direction. If truth be told, you might be better off renting for now if this is your only house financing option on the table.