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When hubby and I bought his grandparent's home years ago, we knew that a traditional mortgage would be tough to swing. Even though we had money for a down payment and would easily qualify for the mortgage, the house itself was a "fixer upper" and couldn't be borrowed against in its current condition. What we did instead was finance the house through the Bank of Mom and Dad.
Also known as seller financing (or a private party mortgage), financing a house through your parents or another relative has benefits for both parties.
When most people buy a home, they borrow the money from a bank or other financial institution which secures the loan against a deed of trust. The borrower makes monthly payments to the bank until the house is paid in full. Seller financing means that the seller acts as the bank. The seller agrees to trade the title of the property in exchange for a promissory note which is secured against the house. The borrower then makes regular payments to the seller until the house is paid off according to the terms of the note.
Although the seller doesn't get a lump sum payment at the time of sale, they do receive regular monthly payments which can supplement their current income. Seller financing also defers capital gains tax and has less effect on yearly taxable income.
From the buyers perspective, there are even more benefits to letting your parents act as a bank. Here's just a few of the advantages we discovered in financing our home through family:
-- No loan origination fees, no points and lower closing costs
-- No credit checks, which is especially nice for the self employed
-- Flexible terms with seller and buyers agreeing to the interest rate and payment due dates
-- Taxes and insurance can be paid separately instead of through escrow
-- Speedy closing, usually less than a week
-- Lower sales price
-- An easy way to improve a credit rating.
With banks unwilling to lend money to buyers with iffy credit, financing a home through your parents is an easy way to make home ownership possible. It only works however, if both parties hold up their end of the bargain.