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In a seller-financed deal, work with your Realtor to ensure that what you're paying is consistent with fair market value.

#6: Protect yourself when you bypass the bank.

Seems like seller financing would be the best of all worlds, right? No bank qualifications you can't meet, no underwriter who requests the same copy of the same paycheck stub you've already produced three times, no loan closing costs -- what's there not to like? Seller-financed deals hold the potential to be just that good, but nothing is perfect. Make sure that your homeownership experience doesn't go haywire when your home's seller finances the deal.

Use protection. Banks build lots of stuff into real estate transactions to protect their interest in the houses they make mortgages on, and those protections often work in favor of their borrowers' interests too! If the seller is financing your purchase, it's all too easy to forgo what may seem like bank-mandated formalities like a title search and title insurance. A title search ensures that the seller has the right to sell to you in the first place and makes sure you're not buying a place that's already in foreclosure.

Similar protections that can go overlooked when there's no bank monitoring the deal are obtaining a robust homeowners' insurance policy prior to close of escrow, reviewing legally mandated seller disclosures and even recording your title to the home in your county's property records. These items shield you from disasters as serious as losing the property and are absolute musts. There's also logistics involved. For example, your bank issues annual tax documents you can use to deduct your mortgage interest. Is the seller prepared to do that? Make sure you have a Realtor, attorney and/or escrow holder on board to line up these legal and logistical lifesavers.

Don't go overboard. Some buyers are so relieved and grateful to get seller-financing that they overpay the seller, agreeing to an interest rate or purchase price that is out of whack compared to the fair market value. With a bank-financed deal, the appraiser is the fail-safe against paying more than the place is worth. In a seller-financed deal, it's up to you and your Realtor to analyze recent comparable sales in the neighborhood and be sure they justify the price you pay. It's fair to add a small premium or pay on the high end of the justified price range for the perk of seller-financing. The seller is making your life easier and agreeing to postpone receiving their money, and that's worth something.

On interest rates, again, it's fair to pay a smidge more than you would pay the bank for a similar loan, because there's value to escaping loan origination fees and the underwriting obstacle course. But you may want to go ahead and get a mortgage broker's good faith estimate for the bank-financing equivalent of the loan being offered by the seller. Make sure you're not paying a huge premium for the privilege of writing your check to the seller.

Gratitude is normally a good thing. But in a seller-financed deal, too much gratitude can get in the way of good judgment and attention to detail, and there's no bank underwriter with guidelines that will have your back. So hire a team of pros to make sure your interests are protected. And if it helps, keep in mind that the seller should be grateful for your willingness to do the deal too!

NEXT: #5: Debunk mortgage myths and know what it really takes to get a home loan >>

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