There are four ways to finance the purchase of a home in a real estate purchase contract. Which you choose to use depends on both the financial positions of the buyer and seller. Your options include:
Third Party Financing: This is when a bank or other lending institution provides a loan to the buyer which must be paid back over time. This is the most common way to purchase a new home, but approval depends on the buyer's credit rating, job history, and current financial situation.
Seller Financing: Sometimes, a seller will provide financing to a buyer who is unable to obtain a loan from a financial institution. This is often the case when a seller has paid off their mortgage, and a buyer simply pays them a pre-determined amount in intervals until the agreed upon price has been paid in full.
Assumption: Assumption is when a buyer assumes, or takes over, the seller's mortgage. This means that the home loan transfers to their name, and they take financial responsibility for the remainder of the mortgage. Assumption often requires that the buyer is qualified to take over the loan under the lender's guidelines.
No Financing: No financing is required when a buyer will be purchasing the residential property in full using their own funds, and will not require a loan.
Other financial terms in your Real Estate Purchase Agreement:
What is Earnest Money? Earnest money is the deposit which a buyer puts down to show their interest and seriousness in purchasing the residential property. If the contract is fulfilled, the amount is credited to the purchase price. If the sale falls through, the money is given back to the buyer.
What is Escrow? When you purchase a property, it is held by a third-party until the closing or possession date. It keeps the property, and any funds, from changing hands until all aspects of the agreement are met, such as home inspections, insurance information, and financing.