With this type of financing you don't have to be bound to strict underwriting guidelines and regulations as you commonly are with traditional loans originated through a bank or mortgage company.
You will generally still be required to give the seller a down payment, make monthly installments on the loan and have to pay interest; but it can be a good way to avoid conventional guidelines, especially if you have credit problems.
It can also save you a few bucks because you won't be required to pay a loan origination fee and you won't be subject to an appraisal and inspection as you would with conventional financing.
Seller financing can work a couple of different ways. With both strategies you're going to negotiate a final sales price with the homeowner and then agree upon a monthly payment for a specified time frame.
The difference is really in how the first mortgage is handled if there is one. If there isn't, you simply make the payments to the homeowner and if you default they take back the property.
When there is a first mortgage in existence, one option is to purchase the property through a second mortgage. In this situation you agree to pay a specified monthly amount to the homeowner in addition to making the payments on the first mortgage as well.
Should you default on either one of the payments, the home will be taken by the entity you failed to pay.
Another way to handle seller financing is with a wrap around or deed of trust. The only difference with this scenario is that instead of you making the payments on the first mortgage, the seller will continue to make the payments out of the funds you give him or her each month for your payment.
The problem that can occur with a wrap around mortgage, however; is it the homeowner fails to make the payments on the first mortgage. If that should happen the lender will take back the property and both you and the homeowner will be out of luck. It won't matter that you've made every one of your payments to the homeowner on time because the first mortgage took priority over the wraparound mortgage.
In order to avoid taking this risk, you can request a clause in the wraparound mortgage stating that should the homeowner default on the first mortgage; you reserve the right to make payments and thereby avoid foreclosure.
