A Largely Unregulated Field

• Banks must follow stringent and voluminous federal and state regulation regarding qualifications, documentation, loan standards and reporting. Although a few states, Kentucky and Tennessee among them, have taken the position that investor-sellers--that is, property owners who are selling investment property as opposed to their homes--must register with state licensing authorities as loan originators and a 2010 federal law requires sellers who finance more than three loans in one year must adhere to federal mortgage standards, most instances of seller-financed residential property is entirely unregulated.
  
  

Options

• Because of the lack of regulation, seller financing options are wide open. The seller decides what standards to use for qualifying the buyer, what type of documentation is required, what the down payment should be and what type of loan and interest rate is offered. Unlike a bank loan, seller-financing is also negotiable. The buyer can negotiate all terms through the real estate purchase contract. Any type of loan imaginable--low or no down payment, fixed rate, adjustable rate, interest-only, short-term, long-term--is possible. Some sellers prefer loans for durations in the 5- to 10-year range but any term is possible. Most want to see a significant down payment as well.
  
  

Cost

• Closing costs for a seller-financed mortgage are generally lower than those for a bank loan. No appraisal is necessary because the seller already knows what his property is worth. There are no loan-origination fees, processing fees or junk fees. The seller can charge discount points--that is, fees to lower the interest rate--but the buyer can negotiate them down or out of the contract altogether.
  
  

Process

• In a standard real estate transaction, a loan contingency is a part of the purchase contract. When seller financing is contemplated, the seller may promote the availability of financing in the listing and then the buyer specifies the loan type and terms he wants in the offer for the property. The loan details are worked out through the offer and counter-offers, and they are locked into place in the final purchase contract.