Content of a seller loan
The seller loan is a special form of loan that real estate buyers are granted when buying the house. It is a building block of so-called mezzanine financing, an intermediate form of own and outside capital. While this variant is quite common in corporate financing, it still has a wallflower existence when buying a house. The peculiarity: The seller grants the buyer a subordinated loan, which becomes a substitute for equity due to the subordination in the land register.
It is always in the last place behind banks and building societies in the land register. As a result, the loan default risk is also the highest for the seller. However, since the risk of default is reduced for the other lenders, the seller or subordinated loan increases the buyer’s equity ratio. The subordinated loan is therefore only effective if it is actually subordinated to the land register. In principle, the seller defers a small part of the selling price without remaining the owner of the house.
Conditions of a seller loan
The average amount of a seller loan is five to ten percent of the sales price, in most cases between 10,000-25,000 USD. As a rule, a market interest rate is required, but sometimes a significantly higher one. In this case, consider whether the property is still worth it, because in addition to the repayment of the seller loan plus interest, there is also the burden of mortgage loans and / or home loan.
This can make financing significantly more expensive and also jeopardize the creditworthiness of the bank due to the high monthly debit. There are two ways of repaying interest and loans : either payment in installments or redemption at one go at the end of the contract. What is cheaper depends on various factors, such as monthly income or the financial resources to be expected in the future.
For whom the seller loan is worthwhile
The seller loan is good for people with a high income but still low equity capital, as this way they can increase the equity ratio. And: The seller loan also speaks for the intrinsic value of the property, since the seller accepts a certain risk of credit default. A disadvantage is the high level of commitment to the property and the fact that an increase in insurance protection (life insurance) is necessary in order to be able to finance the property, especially if the main earner dies, which causes additional costs.
Other forms of subordinated loan
Sometimes friends or relatives also give subordinated loans, which are then treated in a similar way to pure seller loans. There are also free providers of subordinated loans, but interested parties should pay close attention to the interest rate. In many cases, a decent interest premium is required, so that a shot is not worthwhile.