Posted on: 14th Apr, 2004 05:33 pm
Even a decade ago, it was not much difficult to obtain a mortgage as it is now. Home prices were high and lenders had abundant cash at their disposal, making mortgage loans easily obtainable. Even stated income loans and no-doc mortgages were available. The housing market crash of 2007-08 has however reversed the situation and brought about some belt-tightening measures in the market. Currently, the stated income loans or no-doc mortgages have disappeared from the market and the criteria to obtain a mortgage loan have become more stringent. These market realities have forced the home buyers and sellers to become more creative. One of the creative strategies adopted by them is the owner financing.
- What is meant by owner financing?
- What are the different types of owner financing?
- What are the different benefits of owner financing?
What is meant by owner financing?
Owner financing takes place when a property buyer finances the purchase directly through the person or entity selling it. This takes place when a potential buyer can't obtain the necessary funds through the third-party lenders. Owner financing may also take place in case the home buyer is unwilling to pay the prevailing market rate of interest. Again, in case the seller finds difficulty in selling the house, then the seller also may be interested to opt for owner financing.In owner financing, usually the purchase price of the house is partially financed by the home seller and the rest of the amount is financed by taking out a smaller loan. Owner financing is also called as 'seller financing' or 'creative financing'.
Owner financing is common in a buyer's market – a market which has more sellers than buyers. To safeguard his/her interest, the home seller may ask for a high down payment of 20% or more. Here however the deed of the property is not transferred to the buyer unless all the payments are made in full. Since no institutional lenders are involved here, the terms and conditions of the mortgage are negotiable. In fact, terms and conditions are set up in such a way so as to provide benefits to both the buyer and the seller.
Owner financing is common in a buyer's market – a market which has more sellers than buyers. To safeguard his/her interest, the home seller may ask for a high down payment of 20% or more. Here however the deed of the property is not transferred to the buyer unless all the payments are made in full. Since no institutional lenders are involved here, the terms and conditions of the mortgage are negotiable. In fact, terms and conditions are set up in such a way so as to provide benefits to both the buyer and the seller.
What are the different types of owner financing?
In owner financing, sellers and buyers negotiate on the terms and conditions of the transaction, subject to the regulations in the particular state. There is no fixed percentage of down payment that the buyer has to pay to the seller. Down payment percentage may vary from a very low level to as much high as 30% or above. Higher down payment protects the home sellers from the risks of default by the home buyers. Owner financing can be done in the following ways-
- Land contract In land contract, legal title of the home is not transferred to the home buyer but the buyer is given an equitable title, a title that fetches temporarily shared ownership. Payments are made by the buyer to the seller and the buyer becomes the owner of the property once the final payment is made.
- All-inclusive mortgage In this type of owner financing, the home seller is responsible for carrying a mortgage promissory note that is equal to the difference between the home price and the down payment amount.
- Junior mortgage In the current market conditions, many lenders are not willing to offer finance more than 80% of the value of a home. Home sellers may come into the scene and can make up for the difference. The home seller can take out a junior mortgage to compensate for the deficient amount of the home buyer. Here the seller can take out the junior mortgage from the first mortgage taken out by the buyer from the first mortgage lender. However, taking out a junior mortgage loan is comparatively risky as in the event of default by the home buyer, the first mortgage is repaid first and the junior mortgage is paid off later.
- Lease agreement Another form of owner financing is the lease agreement where the home seller gives equitable title to the buyer and leases the home for a contracted term such as an ordinary rental. Once the agreement is over, the buyer has to take out a mortgage loan equal to the purchase price of the home minus the total rent payments made.
What are the different benefits of owner financing?
Owner financing offers several benefits to both the buyers and the sellers. Most of the times, this type of home purchase is a win-win situation for both the parties.
Benefits to the home buyers
Despite the high down payment that the buyer has to make, owner financing offers several benefits to them -- Easy qualification criteria Because of the relatively easy qualification criteria, many home buyers prefer owner financing over traditional financing. Due to recent bankruptcy or divorce, the home buyer may have poor credit, making him/her ineligible for a traditional home financing. Again, the home buyer may be a self-employed person and may not have the necessary documents in support of his/her income. The home buyer may also be very new in the job market and may not fulfill the criteria required to obtain a traditional loan. In addition to these, there are many other reasons which make a home buyer not eligible to obtain traditional financing. Owner financing is certainly a very good choice for these home buyers.
- Tailor-made financing Unlike the traditional financing, here both the buyers and the sellers have the flexibility of choosing from a variety of payment options such as fixed-rate amortization, interest-only or a balloon payment. Home buyers can decide the payment option by negotiating with the sellers.
- No/low closing costs In case of owner financing, home buyers aren't required to pay the closing costs which the home buyers have to pay compulsorily in case of conventional financing. Loan origination fees, processing fees, points, title insurance, underwriting fees, administration fees and many other fees charged by the traditional lenders add up to thousands of dollars. By opting for owner financing, home buyers can avoid these costs.
- Faster closing Here the buyer and the seller are not dependent on a lender to process the loan. Absence of any third party lender, ensures faster closing of the transaction.
Benefits to the home sellers
Sellers aim at obtaining as much price as possible. Sellers also want to enjoy tax saving benefits on the gains accrued. Benefits to the sellers are listed below -- Highest price Since the seller is offering the financing at soft terms, the seller may want to receive more than the fair market value of the property. Buyers may also be agree to pay the premium as they can't qualify for traditional financing.
- Tax saving benefits In case of owner financing, home seller sells the property in installments. Home seller reports only the income received in each calendar year. This means that here the sellers have to pay less tax.
- Monthly cash flow The monthly payments that the home seller receives from a buyer, increases his/her monthly cash flow. This in turn raises the spending capacity of the seller.
- Selling a hard-to-sell property It may be the case that the seller is finding it tough to sell the property through the conventional route. Through owner financing, a home seller can sell an otherwise hard-to-sell property with lot ease.
Related Readings
Related Forum Discussions
- How does owner financing work?
- Owner financing land/home-What if bank loan is due?
- Is owner financing real estate legal?
- Are owner financing interest rates negotiable?
- Where can I get owner finance legal docs?
- Tenants may go for owner finance - What if they go bankrupt?
If you buy a home with owner finance, pay the seller every month but they don't pay the bank what happens to the buyer?
The lender has the rights to foreclose the property as he holds the lien on the property. As there is a mortgage on the property, the seller shouldn't have gone for the option of owner financing.
We are self employed 1099 our accountant is great tehrefore due to the new Bank rulings, we can't qualify, looking for a 4/3 owner finance home in the are of 32833 within 10 miles radious, can you help us we make enough money to easy pay 1500 to 1700 a month mortgage plus all other expenses...em:
[Email address deleted as per forum rules. Thanks.]
[Email address deleted as per forum rules. Thanks.]
If I have my home listed through a realator but sell it on contract with 20% down over 20 years with a 5 year balloon, what do I owe the realator if his commission rate is 5%. I don't think I should pay him based on the sell price when there is no guarentee I will see all my money if the contract goes south.
Hi Joe,
I guess it'll be difficult for members here to help you with owner financing. You can speak to your friends and relatives to find out if they can suggest you a person or direct you to someone who may agree to owner finance.
To tmoney,
The terms and conditions of the contract will help you in calculating as to how much you'll be paying your realtor.
Thanks,
Jerry
I guess it'll be difficult for members here to help you with owner financing. You can speak to your friends and relatives to find out if they can suggest you a person or direct you to someone who may agree to owner finance.
To tmoney,
The terms and conditions of the contract will help you in calculating as to how much you'll be paying your realtor.
Thanks,
Jerry
Hello Jessica,
So I am a little skeptical about owner finance because it sounds to good to be true but I go ahead and tell you my situation because we need to move out when the lease is up in Feb. It's been 13 months since we had to do a short sale on our home due to my husband job transfer to another state, here in our state now we leased a home and the lease is up in February but we were told we needed to wait at least 2 years to able to purchase another home so if we could purchase a home as lease to own it would be great. My husband has a great job making excellent money and been there for 23 years. P;ease advice.
Thank you.
Lucy
So I am a little skeptical about owner finance because it sounds to good to be true but I go ahead and tell you my situation because we need to move out when the lease is up in Feb. It's been 13 months since we had to do a short sale on our home due to my husband job transfer to another state, here in our state now we leased a home and the lease is up in February but we were told we needed to wait at least 2 years to able to purchase another home so if we could purchase a home as lease to own it would be great. My husband has a great job making excellent money and been there for 23 years. P;ease advice.
Thank you.
Lucy
Hi Lucy!
Welcome to forums!
It is true that after a short sale you won't be able to get a mortgage immediately. You will have to wait for 2-3 years in order to get a mortgage to buy a property of your own. In such a situation if you want to buy a home, owner financing will be a good option.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
It is true that after a short sale you won't be able to get a mortgage immediately. You will have to wait for 2-3 years in order to get a mortgage to buy a property of your own. In such a situation if you want to buy a home, owner financing will be a good option.
Feel free to ask if you've further queries.
Sussane
Hi Sussane,
Where do I start looking for owner financing? This all new to me!
Thank you!
Where do I start looking for owner financing? This all new to me!
Thank you!
Welcome Lucy,
You will have to look into listings on the Internet and check out if any seller is interested to go for owner financing.
You will have to look into listings on the Internet and check out if any seller is interested to go for owner financing.
Your property must be free and clear to sell through owner financing. As you already have a mortgage on your property, you will not be able to do owner financing it. If the lender has to know who sold the property through owner financing, you can apply for the loan due immediately.
I want to buy a home owner financing, 5% down= $4500, will be 650 mo, x 240 months. I want to make extra payments, the owner financing will permit extra payments? I want to pay the loan faster with less interest charges. Or I have to pay exactly 650 every month?
Lily
Lily
Hi Lily,
You will have to speak to the seller of the property in order to find out if he or she will accept extra payment. If he or she agrees to it, then you'll be able to pay off the loan faster.
Thanks,
Jerry
You will have to speak to the seller of the property in order to find out if he or she will accept extra payment. If he or she agrees to it, then you'll be able to pay off the loan faster.
Thanks,
Jerry
to a guy that has bad credit and doesnt want to try for financing and i am charging him 9%. is this legal
Hi Bkogirl,
If you don't have any mortgage on the property, then you can definitely owner finance the property to someone else. You can sign a contract with the buyer mentioning the terms and conditions of the deal. You can draft the contract with the help of an attorney.
Take care.
If you don't have any mortgage on the property, then you can definitely owner finance the property to someone else. You can sign a contract with the buyer mentioning the terms and conditions of the deal. You can draft the contract with the help of an attorney.
Take care.
In the current discussions, the pitfall of a seller doing owner financing is possible buyer default, and bank foreclosing on the home. How would this work if the owner has no current mortgage on the home and so the owner would hold the loan to the seller?