Seller financing is one of the most popular methods for purchasing and selling real estate. The down payment is often less than an investment loan requires and the terms, especially if the property is purchased “subject to” can be far more favorable than a bank could currently offer. Under Utah law, the following types of seller financing and default remedies are used.
What is Seller Financing?
Seller financing is purchase and sale transaction where the seller provides some or all of the funds necessary to finance the property the buyer is purchasing.
What are the basic types of seller financing?
1. Note and Deed of Trust. This document set is used where the seller does not have a loan on the property at the time of closing. When using a Note and Deed of Trust, both the ownership of the property and the record title transfer to the buyer. In the event of default, the seller’s remedy would be a non-judicial foreclosure.
2. All Inclusive Note and Deed of Trust. This document set is used when there is an underlying deed of trust recorded against the property that will not be paid off at the time of the seller finance closing. The new seller financing “includes” all other loans on the property. When using an All Inclusive Note and Deed of Trust, both the ownership of the property and the record title transfer to the buyer. In the event of default, the seller’s remedy would be a non-judicial foreclosure.
3. “Subject to” seller financing. This document set is used when the seller is not owed any additional amounts on the property and the buyer is essentially going to pay just the underlying note(s) payment and payoff. When doing “subject to”, both the ownership of the property and the record title transfer to the buyer. In the event of default, the seller’s remedy would be a non-judicial foreclosure.
4. Contract for Deed. A Contract for Deed may be used in the event there is an underlying deed of trust on the property or in the event the property is paid off at the time of closing. When using a Contract for Deed, “ownership” (under the doctrine of equitable conversion) transfers to the buyer, but the title remains in the name of the seller. This allows the seller to generally do a 30 day forfeiture proceeding to eliminate the buyer’s interest in the property instead of a 4 month foreclosure process. It has become very popular recently (although it is as old as any other form of seller financing) since it reduces the risk of seller financing to the seller, but still allows the buyer to refinance, even though the buyer is not on title.
5. Mortgage. A Mortgage is not often used in Utah, but is a form of seller financing. There is also an all inclusive mortgage in the event their is financing on the property that will not be paid off at the time of closing. Mortgages have fallen in popularity because, among other reasons, the seller has to do a judicial foreclosure in the event of default. This process is significantly longer and more costly than either a Contract for Deed forfeiture proceeding, or a note and deed of trust/all inclusive foreclosure.
There are certainly other types of seller financing and this should not be considered an all inclusive list. It should also be noted that seller financing is a tool in your tool box, not the only tool, but a very good one. Whether it is your first purchase on a home you will live in, the first time you are selling a home, or the 100th transaction you are completing, there is always more to learn. Feel free to call if you have questions.
