Owner financing has rapidly become one of the more popular options for many Utah homeowners who are looking to sell their homes quickly, legally and with the incentive of additional revenue generated from interest fees. It’s a fast transaction compared to the traditional selling approach. Seller financing comes with no origination or underwriting fees and eliminates the lengthy and uncertain time many home buyers face with mortgages from traditional lenders.
But any loan—even the most informal—is going to need some form of documentation in order to secure your legal rights as a seller. Good faith alone simply isn’t enough. And while it is recommended that some prior investigation into a buyer’s ability to repay a loan should be conducted, you’ll also need to maintain the proper paperwork for the sake of liability.
If you’re a homeowner in Utah who is considering selling your home through owner financing, here’s the top five forms you’ll need.
1 – Promissory Note
A promissory note is a legal lending document indicating a buyer agrees to pay off a set or variable loan in a given amount of time and under specific terms. Typically, it will include:
- The name and address of both the borrower and the lender
- The exact amount of money being borrowed
- Terms of the collateral being used
- A payment schedule with detailed amounts, including applicable interest rates and amortization schedules
- Signatures of both parties
Establishing the terms of collateral is absolutely critical in a promissory note. You’re essentially acting in lieu of a mortgage lender during a seller financed home transaction; and just like a traditional lender, you should retain the right to foreclose should a buyer default on payments. Keep in mind that promissory notes can be both secured and unsecured; but with an unsecured note, you’re not guaranteed any reimbursement should a buyer default. Unless you’re absolutely certain of a buyer’s credit history and their subsequent ability to repay, it’s strongly recommended you use a secured note for any real estate transaction.
A real estate purchase contract is a binding agreement which conveys the rights to both real property and land to a buyer. It establishes both the legal consideration of the transaction as well as contingencies based on everything from a buyer’s ability to repay a loan to their right to cancel should an inspection service find significant damage to a property. It should include:
- A description of the property and the land on which it sits
- The condition of the property
- A seller financing addendum
- Any essential rights and obligations of the buyer
- Conditions that must be met prior to the sale
- Fixtures and appliances included in the transaction
- The amount of the earnest money deposit, which shows the buyer’s good faith and intention to close the deal
- Itemized closing costs and who is responsible for paying for each of them
- The prospective date of closing
- The signatures of each party
- Terms of possession of the property sold
A seller financing addendum is an integral part of the real estate purchase contract in the state of Utah. It details both the credit terms, the amount of the loan, payment schedules, earnest money that may be due on deposit, the amount due at the end of the contract and any deed of trust allowing a third party to take possession of a home should a buyer default.
An all inclusive trust deed (or AITD) is an instrument secured by a promissory note which combines multiple loans into a single document for the sake of convenience. In an owner financed transaction, it combines both the original mortgage terms as well as the secondary mortgage to be paid by the buyer directly to an owner at additional interest. An AITD isn’t legally necessary for a seller financed sale; but if you’re looking to preserve the original mortgage loan (which is more than likely be at a much more beneficial rate to you as a homeowner,) you’ll unquestionably find it to your advantage to attach one.
An earnest money deposit is simply an agreement made in good faith that a buyer has deposited a set down payment to ensure the legitimacy of their offer. It’s held in escrow until closing by a third party, typically a real estate attorney or a title company. The amount must be specified within the contract, and any money held should be credited toward the final negotiated purchase price.