Did you get a seller-financed mortgage when you bought your home? Maybe you weren’t eligible for standard bank financing or you didn’t have a large enough down payment to make bank financing possible. Whatever the case may be, there will come a time that you will want to or maybe even have to refinance.
What do you need to know?
Know the Term’s Length
Seller-financed mortgages generally come with a shorter term. They also usually have a balloon feature. This means you make fixed payments based on the pre-determined interest rate for the term. However, at the end of the term, the entire remaining amount is due. This could mean hundreds of thousands of dollars, depending on the price of the home.
Knowing when your balloon payment is due will help you plan the best for refinancing the loan. You need to make sure you start the process long before the balloon’s date to make sure you have the financing to pay it off.
Make Sure the Deed is Clear
Hopefully, before you bought the home with a seller-financed loan, you did your due diligence regarding the title work. It’s important to enlist the help of a real estate attorney when doing this type of financing. This way you know a proper title search is conducted and you can rest assured that the seller is able to sell the home and that no one else can stake a claim in the home.
You’ll want to double check the title when you refinance. In fact, the lender will require it. This is just to protect their interest in the home. If you refinance the home and then someone else comes forward and stakes a claim in the home, it could push the lender’s lien position lower than first position, which is the only position they want.
Make Sure You Have Timely Payments
One of the largest factors lenders consider when refinancing your mortgage is your mortgage payment history. If your lender doesn’t report your payments to the credit bureau, you’ll need proof that you made your payments on time.
You can do this in one of two ways:
- Ask the seller to complete a mortgage payment history letter stating the dates and timeliness of each mortgage payment over the last 12 months
- Keep the canceled checks for each mortgage payment you made to provide proof that you made them on time.
Fix Your Credit
As soon as you buy the home with seller-financing, you should start working on your credit. It could take months or even years to get things where they need to be to get proper financing. Make sure you do all of the following throughout that time:
- Pay your bills on time
- Take care of any collections
- Pay excessive debts down
- Eliminate any debts that you can
- Don’t open new credit
- Don’t overextend your credit
Over time, your credit score will start improving. Again, this won’t happen overnight, so make sure you allow plenty of time to let things work themselves out.
Solidify Your Income
Lenders are also going to want 2-years of solid employment at the same employer. They’ll also look at your income over the last 2 years. It’s important to have increasing income over time. If you have a pattern of decreasing income, it’s a red flag for lenders.
If you can help it, stay at the same employer. This way you show reliability and consistency – the two things lenders want to see. You should also make sure that your income covers your current debts plus the potential moorage payment. You should still have disposable income available. Lenders like to see your total debt ratio no higher than 36% – 43%, depending on the loan program.
Refinancing your seller-financed mortgage isn’t impossible. In fact, it will probably be easier this time around, if you took the time to fix your credit and stabilize your income. Make sure you have equity in the home and have proof of your timely mortgage payments to make the process as simple as possible.