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It’s a good idea to be open to a variety of financing options when it comes to selling your home. While you may not think it’s important to understand the financing terms as a seller, the more informed you are about the types of loans available, the better you’ll understand the business end of buying and selling a home.

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While many sellers will not consider underwriting a mortgage loan because of the risks involved if the buyer doesn’t make the payments, it’s smart to know all the facts so you can make an informed choice. Let’s take a closer look at some of the financial options that are open to buyers who may purchase your home.

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What is a Conventional Mortgage Loan?

Conventional mortgage loans are fixed rate or adjustable rate loans that are not insured by the government and are funded by mortgage loan companies, banks, or credit unions. These loans are considered traditional because they require a credit check, a down payment, and additional requirements that are set in place by the mortgage loan company.

Mortgage Loan

Some buyers may have trouble getting a conventional loan if their credit is not suitable or they lack the down payment required. This type of mortgage loan is beneficial because the insurance for them can be lower when compared to guaranteed loans.

Conventional loans are also referred to as conforming loans that comply with guidelines that meet the funding criteria by Fannie Mae and Freddie Mac. When buying a Fannie Mae property, a pre-approval letter is required.

The pre-approval letter lets the lender know that the buyer’s finances are in order and have been thoroughly investigated by financial consultants and they have qualified for a certain loan amount. This is a strong backing and increases their chances of being approved for the loan.

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This pre-approval is good news for you as a seller because it means that the buyer is more likely to be approved for the loan and be able to complete the sale if their offer is accepted. Keep in mind that conventional mortgage loans represent many mortgages and can come with a fixed rate or an adjustable rate.

What is the difference between fixed and adjustable rates?

With a fixed rate mortgage, the buyer pays the same interest rate for the term of the loan. With an adjustable rate loan, the buyer may have a fixed rate for the introductory period that changes at preset intervals.

rate over house

When interest rates are higher, variable rate loans are usually popular because they usually have a lower monthly expenditure. A fixed rate mortgage is best for those who prefer to know exactly what their mortgage will be throughout the term of the loan.

What is an FHA Loan?

A Federal Housing Administration (FHA) loan is not provided by that government agency, but they are insured and guaranteed by the agency. This means that the loans often have higher interest rates, but they are easier to be approved for if you have a lower credit score.

In order for a buyer to qualify for an FHA loan, they will need to have a stable source of income, a social security number, and a credit score that is above 500. The property that the buyer is attempting to purchase must be FHA approved.

This is important to know as a home seller with a buyer interested in this type of loan. In order to have your home qualify, there will need to be a special appraisal completed through the FHA.

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These loans are popular among first time home buyers because they have low or no down payment options, and they can be easier to qualify for than a conventional home mortgage loan. They are also popular amount those who have experienced financial hardships that required them to seek a bankruptcy because in some cases, they can still qualify for an FHA approved loan.

What is a VA Loan?

The U.S. Department of Veteran’s Affairs (VA) works with mortgage loan companies, but they do not supply the loan themselves. Instead, the VA offers a guarantee to the mortgage lender on the buyer’s behalf.

While the credit score required is now as high as a conventional loan, most cases will require a score of 620 or higher to qualify. These loans are made available to United States military members and veterans of military service.

VA loans usually come with little or no down payment for those who are eligible for the loan. If an applicant goes through the VA to get approval prior to applying for a mortgage loan, they may find that the process goes faster and smoother.

What is a Department of Agriculture Loan?

The United States Department of Agriculture provides mortgage loans to those who qualify through the USDA Rural Development Guaranteed Housing Loan Program. The catch to qualifying for one of these loans is that the home being purchased must be in a rural location.

Mortgage Loan

As a seller, this is important to know if you have a home in an area that may qualify as a choice for one of these loans. Buyers who qualify for this loan will have no down payment and a low interest rate because these loans are meant to stimulate the economy and provide a mortgage loan opportunity for those who may not qualify for a conventional loan.

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A buyer will need to be a U.S. Citizen, have a stable source of income, be able to afford the monthly mortgage payment, and have a credit score of 640 or higher is they want to be processed quickly. While lower credit scores are considered, there is a stricter approval process they must go through in order to receive their loan.

What is Home Owner Financing?

A home owner financing involves the buyer purchasing the property directly through the financing offered by the home seller instead of getting a conventional loan or some other mortgage loan. The home seller becomes the lender and the buyer pays the payment each month to the seller for the term of the loan.

red letters blocks HOA

A home seller may choose to use home owner financing if they’ve had challenges selling the home, don’t wish to wait to sell the home, or wish to offer the home to buyers who may not be able to buy the property otherwise. The buyer may not be able to get financing from traditional sources.

In offering a home owner financing option, you remove the bank from the picture and provide the loan for the buyer. You may want to secure a down payment, much in the same way a mortgage loan company would, or you may choose to divide the down payment into the payments.

It’s best to have an attorney draw up the paperwork and check over the terms of the sale to make sure everything is covered properly for the buyer and the seller. The contract will include details about the down payment, monthly payments, and any other information that is important to the sale.

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The home’s buyer will hole a trust note that is a binding contract that the buyer holds the property legally and without back assistance. There will be a legal document that lays out the right of the original owner to reclaim the property should the buyer not make the agreed upon payments.

This may be a good option for the sale of your home if it’s in a distressed real estate market or needs repairs that will be seen to by the new owner. Investors sometimes choose this option for homes that are no longer being rented and the home has no liens or mortgage loan responsibilities.

What are important things to remember as a seller?

Your home is one of the biggest investments you hold, and you want to take the sale seriously and investigate all options when it comes to accepting financing options suggested by buyers. Your real estate agent has the knowledge and experience to help you understand the processes and offer valuable advice when you’re contemplating offers from various buyers.

Va Loan

The financing options for loans such as those guaranteed by the VA or FHA come with additional requirements that must be met by the home seller. Consider this carefully to determine whether the additional requirements are worth the opportunity to have your home sold. The appraisal required in some cases may be helpful and worth the time is takes in order to sell your home without delay.

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