There’s no doubt that high mortgage rates are discouraging St. Cloud home buyers—which made last Monday’s Wall Street Journal piece about a “more popular option” of special interest to St. Cloud home sellers. The option under the spotlight was “an unlikely source: the seller of their house.” Although the story laid out various scenarios where that solution has been adopted, it’s still something of a rarity in residential sales. The Journal detailed some of the reasons why.

The article was prompted by current conditions, including the interest rate climb toward 7%. “Seller financing has become strategic in recent months given our current state of the finance markets,” according to one risk manager. Even so, sellers who have financed a buyer’s purchase by taking back a mortgage “belong to a tiny club.” The drawbacks are mainly those faced by sellers, who, when they step into the lender’s shoes, find themselves needing to perform the kind of risk assessments that lenders have honed through decades of experience.   

Although reports contend that interest has been rising in the practice, it is buyers who are considered to gain the most. They stand to benefit by avoiding closing costs, and often, lower interest rates than would be offered by lending firms—in effect, increasing their purchasing power. That would be necessary since most sellers make it mandatory that the purchase be for at least the full asking price.

Most such transactions see the seller handing title to the property at closing, so the seller’s “significant risk” is if the buyer defaults—which can force a foreclosure. The Journal reports that the current time required for that process can be anywhere from 104 days to the current Michigan average of 2,601 days. As a result, the percentage of seller-financed transactions in Minnesota is minuscule. In fact, across the nation, only 1.04% of active listings even mentioned seller financing.

There are many tax issues, one of which limits how generous a seller’s interest rate offer is likely to be. The Internal Revenue Service watches to be sure such rates don’t fall below their minimum Applicable Federal Rate, which varies according to the term of the loan. Were the rate to fall below the AFR, the IRS could charge sellers for interest amounts that they didn’t actually collect. In July, the published rate for long-term loans of more than nine years was 3.92%.

There are ample reasons why seller financing for St. Cloud homes remains rare, and should always be discussed with a qualified financial advisor. To discuss the whole range of options that buyers and sellers find in today’s St. Cloud real estate questions, call me anytime! 

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