Seller financing can be an advantage

Offering to finance the sale of your home can give you an advantage over other sellers in the battered housing market.

It allows you to consider buyers who might have trouble getting a bank loan because they lack perfect credit, are self-employed or have a commission-based salary.

Seller financing works much like a bank loan -- only you're the bank.

The buyer gives you a down payment and agrees to make monthly payments over a set period, just like a regular mortgage.

Like a bank, you charge the buyer an interest rate for the loan.

For example, if a buyer put down $20,000 for your $150,000 home, you could charge interest on the remaining $130,000.

In many cases, private sellers can afford to charge less than banks, which recently have charged an average of 4.5 percent  for typical fixed-rate loans and more than 7 percent for jumbo loans. That gives the buyer a break.

Each month, the mortgage payment gets sent to you, which provides you with a steady income source.

You don't need to have paid off your mortgage to offer seller financing. You can use a portion of the buyer's payments to keep your mortgage for the home current.

However, seller financing is not for everybody.

If you need the money from the sale of your home to purchase another one, it probably won't work for you.

Here are a few additional things to consider before handing over the keys to your home:

Have enough cash set aside in case you need to foreclose. If the buyer defaults, you'll have to foreclose to protect your interest in the deal, and that can be expensive. Broadbent estimates the minimum cost would be $1,500 to $2,000. It could be more if you didn't pay off your first mortgage before selling the home to a new buyer.

For example, say you still owe the bank $90,000 for your home, which is worth $150,000, and you're making monthly mortgage payments of about $700 based on a 6 percent loan.

If you offer financing to someone willing to buy your home for $150,000 with a cash down payment of $30,000, you'll carry a note for $120,000. That's what the buyer still owes you.

Charge the buyer slightly more interest than you're paying, and you can safely cover your monthly mortgage payments with the buyer's payments. Charging 7 percent interest would get you $850 a month.

If the buyer were to stop paying and require you to foreclose, you'd have to come up with an extra $700 a month for your mortgage payment or risk defaulting on your loan.