Financing refers to the process of paying off a large purchase (like a house) over time rather than in a lump sum. This process, also called amortization, usually involves borrowing money from a third-party like a bank or loan office to pay for the home, and then the borrower pays back the third-party lender.
There are four ways to finance the purchase of a home in a real estate purchase contract. Which method you choose to use depends on the financial positions of both 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 when a buyer will be purchasing the residential property in full using their own funds and will not require a loan.