‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at [email protected].
Dear MarketWatch,
I recently bought a seller-financed home with the wholesaler sellers requiring that I take their seller financing at an 8.99% interest rate for a 30-year mortgage with the terms being I cannot refinance for one or two years unless I pay either a $6,000 prepayment penalty to refinance after one year and one day, or pay a $20,000 prepayment penalty if I refinance within one year.
This mandated seller financing package appears to me to be like subprime lending even though my wife and I have 750 and above credit scores and could qualify for today’s low mortgage rates.
I know the simple answer is to just walk away, however, my wife fell in love with this house and we just had to buy it, according to what she told me.
What government regulatory agencies protect buyers from such seller-demanded high interest finance schemes and how can I determine whether this “forced” seller-financed package breaks the law, or not, by using usurious interest rates? We are basically paying mostly all-interest payments and only reducing the principal balance by only about $1,160 during the whole first year. We paid $222,000 for the home, with a $44,400 cash down payment (20%) and financing $177,600 for 30 years.
Thank you very much for any insights on this “forced” seller-financing package.
Best regards and thanks for your articles,
“Trying to Live the Retirement Dream in Florida”
P. S.: Yes, I know this should have been a “walk away” deal, however, a Happy Wife makes for a Happier Life. So even though my mind said, “Walk away,” my heart said, “Buy it for the wife to achieve a happier life,” so we did end up buying it, hook, line and sinker!
Dear Retirement Dream,
It sounds like you’re taking the Sheryl Crow approach to life: “If it makes you happy, it can’t be that bad.”
I totally understand the desire to make one’s spouse or partner happy, especially when deciding something as important as where to live. But in this case it’s clear that your home purchase came with an unexpected feature: Buyer’s remorse.
Seller financing isn’t a common practice, but it is a legal one. And you came across one of the biggest risks associated with this route. Typically, sellers who finance the home sale charge a higher interest rate than a traditional mortgage lender would.
The seller is acting like a bank in this scenario — but unlike a bank or traditional mortgage lender, they may not be able to sell the loan or rely on other funds should you default on your mortgage. So, in turn, they’re charging you a higher interest rate to cover the risk they’re taking.
Why would a seller want this? The closing process can be faster when going this route, which can grease the wheels of the deal. Plus, sellers can see tax benefits and higher sales prices, because there isn’t necessarily an appraiser shooting down the value quoted.
You’re right that there are laws to prevent usurious interest rates. These laws vary from state to state. In Florida, for example, a usurious interest would be one that exceeds 18% on loans of up to $500,000 and 25% on loans above that amount.
“Lenders and borrowers must keep a watchful eye on the various factors that have the potential to make lending transactions usurious,” advisory and accounting firm Berkowitz Pollack Brant notes.
Prepayment penalties like the ones you agreed to — because let’s remember, you agreed to these terms — are also more common with seller financing.
My hope is that you negotiated where possible on the rate, terms and duration of the loan. Typically, buyers can benefit from seller financing if they have poorer credit. The debts may also not appear on your credit report, depending on the seller.
In most cases, sellers are subject to the same regulations as a mortgage lender if they finance the deal themselves, which is good news for you. But I hope you also did your own due diligence before taking the leap with this home purchase.
Yes, an 8.99% interest rate is high, especially by today’s standards. The 30-year fixed-rate mortgage averaged 3.05% for the week ending March 11. I trust you can afford the monthly payments for the next couple of years, at which point you should consider refinancing without the penalty. There’s no guarantee mortgage rates will be as low then as they are today, but you can feel fairly confident that they won’t be as high as the one you’re locked into.
In the meantime, enjoy the time with your wife and take pleasure in her happiness.
