What to Charge When You’re Financing the Sale of Your Home

By Eric Tyson, Ray Brown

When you’re seller financing the sale of your house, you need to set the terms — interest rate and fees — on the mortgage. As with collecting the financial data on a borrower, you don’t need to reinvent the wheel.

Because agreeing to terms and administering an adjustable-rate loan are complicated, you’re far more likely to make a fixed-rate mortgage. Call several local lenders to find out the rates they’re charging for the size and type of loan that you’re contemplating (for example, 15- or 30-year fixed-rate mortgage, first or second mortgage, owner-occupied or rental property). Be sure to ask about all the fees — application, appraisal, credit report, points, and so on. Although you may not charge all these same fees, you nevertheless need to understand what the competition is charging.

Some states have usury laws that forbid unregulated lenders (that is, private individuals like you) to charge loan origination fees, prepayment penalties, and so on. These laws also put a ceiling on mortgage interest rates that unregulated lenders can charge. You should consult a local, competent real estate lawyer about local usury laws.

All else being equal, you should charge a higher interest rate for jumbo loans (loans in excess of $424,100 for a single-family dwelling as of 2017; $636,150 for the highest-cost housing counties), longer-term loans, loans with less than 20 percent as a down payment, rental property loans, and second mortgages. (See the limit by county.)

If the borrower is in good financial health and can easily qualify to borrow from a traditional lender, offer better terms than the commercial competition. You may decide to charge the same interest rate but not upfront fees. Most buyers are short on cash, so a reduction in closing costs usually is well received. Besides, unless the buyer sells or refinances within a few years, a mortgage’s ongoing interest rate is the greatest determinant of how much you make anyway.

Charge a premium to borrowers to whom you’re willing to lend but who are unable to get a good loan — or any loan — from traditional lenders. Remember, you need to be compensated for the extra risk you’re taking. You may add as much as 1 percent or 2 percent to the ongoing interest rate on the loan and charge fees comparable to a lender. Be absolutely sure about the reasons why the borrower got turned down for a loan from a traditional lender and make certain you’re comfortable with taking on a risk that an experienced mortgage lender wouldn’t.

Unless you’ve made mortgage loans before, you may not have a clue as to how to go about drawing up a loan agreement, so hire a real estate attorney to draw one up for you. Expect the cost to be several hundred dollars — that amount is money well spent.

You also want to make certain that the buyer of your home is paying the property taxes. In most states, the taxing authority can foreclose upon the home if property taxes become delinquent. The timing and procedures vary, so check with an attorney or your local taxing authority. In some areas, you can hire a tax service to monitor whether the taxes are paid each year.

One final piece of advice: If you sell the house and make an owner-occupied loan to the buyer, you may afterward want to ask for proof that the borrower is living in the property rather than renting it out. You can ask for utility and other household bills to see if the bills are in the buyer’s name. Or you may just stop by and knock on the front door of your old house to see who’s living there.

Rental property loans are riskier to make and should carry a higher interest rate.