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?
I owner/financed my home on a year to year contract, because they said they were not sure when they would be able to finance the home, Am I to renew the contract every year, since it is just a yearly contract and not a specified time.
Welcome Guest,
As it is a yearly contract, you can renew it on a yearly basis. There won't be any problem with it. In case you get a buyer who will immediately buy the property, then you can decide not to renew the contract any more and sell off the property to that person.
As it is a yearly contract, you can renew it on a yearly basis. There won't be any problem with it. In case you get a buyer who will immediately buy the property, then you can decide not to renew the contract any more and sell off the property to that person.
i want to buy a house for 135,000 and the home seller wants 3900 down with a 1290 monthly mortgage payment and is seller said there would be no banks involved its gonna be between the seller and buyer and a contract would be made plus seller said it would carry the buyer is that safe to do
The seller has offered you the option of owner finance. It is a good option provided you are satisfied by the terms and conditions mentioned in the agreement. You should read through the document and check out whether or not you will be able to afford it.
How does it work to buy house from owner (on a contract) if owner owns home free and clear.
Hi tletilschu!
Welcome to forums!
If the property is free and clear, then you can definitely go ahead with the option of owner financing. You will have to sign an agreement with the owner regarding this financing. This agreement will mention the required terms and conditions of the financing. You can get more information in this regard from the given page: http://www.mortgagefit.com/owner-financing.html .
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
If the property is free and clear, then you can definitely go ahead with the option of owner financing. You will have to sign an agreement with the owner regarding this financing. This agreement will mention the required terms and conditions of the financing. You can get more information in this regard from the given page: http://www.mortgagefit.com/owner-financing.html .
Feel free to ask if you've further queries.
Sussane
tletilschu:
Owner financing works the same whether there is an existing lien on the property or not. If you're being given reasonable terms for the repayment of your loan to purchase the property, then it's up to you to act accordingly.
Be sure you have legal counsel to review all documents for you, to ensure that all your rights and responsibilities are covered.
Owner financing works the same whether there is an existing lien on the property or not. If you're being given reasonable terms for the repayment of your loan to purchase the property, then it's up to you to act accordingly.
Be sure you have legal counsel to review all documents for you, to ensure that all your rights and responsibilities are covered.
We want to buy the house we've been renting for the past 3.5 years. The house is in the middle of many acres of orchard. We don't want the orchard, just the house. The owner has a mortgage through a bank that includes our house and another house and the many acres of orchard. Can the owner do an "owner finance" for our house and the immediate property it is on (about an acre) in Washington State?
Hi Pamela,
It can be very difficult to owner finance only the house. Moreover, if there is an existing mortgage on the property, then it will be illegal for the homeowner to owner finance the property. You should first speak to a real estate attorney and then take a decision in this matter.
It can be very difficult to owner finance only the house. Moreover, if there is an existing mortgage on the property, then it will be illegal for the homeowner to owner finance the property. You should first speak to a real estate attorney and then take a decision in this matter.
Hi gizmo,
You should go through the owner finance agreement and also take the help of a real estate attorney in this regard. He will let you know whether or not the agreement will be considered as illegal. You can also check out with the attorney as to what steps you need to take.
Thanks
You should go through the owner finance agreement and also take the help of a real estate attorney in this regard. He will let you know whether or not the agreement will be considered as illegal. You can also check out with the attorney as to what steps you need to take.
Thanks
We currently are in process of purchasing a home/land and need to pay off debt and or reduce mortage payments
Is this possible with poor credit
Is this possible with poor credit
Welcome Jennieh,
With a poor credit, it will be very difficult for you to qualify for a new mortgage. Most of the lenders will want you to have good credit so that they can consider you for a loan.
With a poor credit, it will be very difficult for you to qualify for a new mortgage. Most of the lenders will want you to have good credit so that they can consider you for a loan.
i went thrpugh a realtor to buy a house with the owner financing. I put down five thousand dollars on March 15. By the way the realtor is my uncle. I signed a contract in March. I havent heard anything since. When i try to talk to him he is always busy. i just want my money back and not geal with him anymore. What do i have to do?
Hi j wilson,
If you cannot deal with the realtor and the lender on your own, then it will be better if you could contact an attorney and ask him to deal with the concerned person. The attorney will let you know what you need to do in this regard.
Thanks,
Jerry
If you cannot deal with the realtor and the lender on your own, then it will be better if you could contact an attorney and ask him to deal with the concerned person. The attorney will let you know what you need to do in this regard.
Thanks,
Jerry