Scotsman Guide - November 2008 Residential Edition

How to Develop a Seller-Financing Plan
Realize future business from all parties in a seller-financed transaction
By Todd Huettner, president, Huettner Capital

Mortgage brokers who work on seller-financing transactions can realize opportunities for future business with the buyers, the sellers and the real estate agents involved. The most-obvious opportunities involve helping sellers finance their next transaction and helping buyers create an exit plan. By providing insight that many accountants, real estate agents and attorneys lack, brokers can ensure their position in future deals.

Uncertainties about qualifying for the next loan often prevent sellers from offering financing for their property. If they believe they can’t get a new loan to buy their next house, they likely won’t consider seller financing. In addition, buyers often wonder if they’ll be able to refinance out of a seller-financed mortgage when they qualify for a traditional loan.

It is up to you, as a mortgage broker who understands the process, to evaluate the buyer, the seller and current underwriting guidelines to develop a plan that enables sellers to finance their next home and buyers to refinance when they’re ready and qualified.

Your expertise and effort will benefit the buyers, sellers and real estate agents, which will serve to lay the groundwork for future business. You save a deal for the real estate agents and essentially prequalify the buyer and seller for the future loans they plan to use.

Evaluate the buyer

Buyers are usually more open to seller financing than sellers. Typically, they will be concerned about the interest rate and being able to refinance to a traditional loan as soon as possible, however.

Todd Huettner is president of Huettner Capital, a residential and commercial real estate financing broker. He specializes in complex transactions, multiple properties, wealth management and divorce-related issues. In addition to possessing a master’s degree in business administration, Huettner has more than 15 years’ experience in the finance, mortgage and real estate industries. His articles appear in national and local publications. Find his financing-adviser alerts at www.toddhuettner.com. Reach him at (303) 758-7402 or todd@toddhuettner.com.

First, identify the borrower’s reason for using seller financing. Some borrowers want a loan at a lower rate but fail to consider the costs of refinancing and the risk of higher rates in the future. Sometimes, a conventional or portfolio loan may be the best option for buyers.

Once you determine the buyer’s need for seller financing, you can identify different options for downpayment, including using equity from other properties the buyer owns. Often, the seller will require a minimum amount of money; you need to know if the buyers can put that amount down, even if they prefer to put down less.

You also must show borrowers how they can refinance their seller-financed loan or how they can buy or refinance a different property while they have the seller financing in place.

Review the following current underwriting guidelines for your buyers, based on their situation:

■■ Refinancing land contracts: Fannie Mae determines the loan status based on the land contract’s execution date. If the buyer executed the land contract within the past 12 months, the transaction will

be a purchase. If it has been more than 12 months since the land contract’s execution, it will be a refinance. Fannie Mae does not allow cash-out refinances and makes no changes for property type.

Freddie Mac does not have seasoning requirements for refinancing a recorded land contract. If the land contract is not recorded, it will treat any transaction as a purchase. Freddie Mac allows cash-out refinances but requires six months’ seasoning for investment properties.

■■ Multiple properties: When buyers own multiple properties, Fannie Mae limits them to a maximum of 10 financed one- to four-unit properties. Freddie Mac limits borrowers with multiple properties to a maximum of four financed one- to four-unit properties.

■■ Rental income: If buyers plan to turn an existing primary residence into a rental and use the rental income, Fannie Mae requires buyers to have 30-percent equity in the property. It also requires that the rental income is documented with a copy of the fully executed lease agreement, receipt of a security deposit from the tenant and deposit into the borrower’s account.

Freddie Mac requires 12 months’

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