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 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?
- Land contract
- All-inclusive mortgage
- Junior mortgage
- Lease agreement
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.
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.
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.
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?
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
- Tailor-made financing
- No/low closing costs
- Faster closing
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.
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.
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.
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
- Tax saving benefits
- Monthly cash flow
- Selling a hard-to-sell property
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.
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.
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.
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.
Before agreeing to owner financing, both parties should consult separate legal counsel in their state.
I would like to buy a house with no money down and no closing costs from a fsbo assuming I found one can the seller and buyer agree on a price paid as a home loan with interest possibly with any closing costs coming out of earnest money and taxes being paid by buyer and of course closing being handled by a title agent would seller have deed and right to rent property and in agreed upon timeframe to remortgage with a bank or lender or to sell property and payoff original seller holdig the note?
you'd better find out if the current owner has a current policy. if not, you're all in jeopardy.
how can it be that "we own the house until we buy it"??? frankly, i don't see any sense in that statement.
2 years ago i bought a house in texas..my credit was bad..i paid $108,000
but put down $30,000..........the seller gave me their business card they worked for a real estate company....now i found out they were fired because of doing these type of seller financing loans....anway my problem is ..........i pay my monthly payment allways at time....after trying for two years i finally got a copy of their bank statement......they owe $3,000 to bank more than i owe to them. they have not paid yearly association fees which i pay to them monthly and the big one is they have a 30 year loan with the bank and i have a 20 year loan with them.....should i get an attorney for fraud and misrepresentation......also isnt the real estate company responsible for the actions of their agents?????? please help me i am on disability..........agent orange from vietnam.........have limited funds
thanks....re phil
rockcop, that's precisely why you need to engage the services of an attorney - to represent you, yes; but more so to assure you of the validity of your purchase, to assure you that what you fear cannot take place and to assure you that you're making a reasonable decision.
ARE THERE ANY GOOD WEBSITES TO VIEW OWNER FINANCING HOMES AND A LIST OF GOOD OWNER FINANCING AGENCIES IN TEXAS.
Welcome acorn,
You can sell off the property without taking any help from the agent. This will help you in saving the commission which you had to otherwise pay to the agent.
Seller/Owner financing is a good option for those who cannot qualify for a traditional mortgage, however the interest rates are a higher.Am i right?
does a domesic partner or fiance quailify for a gift of equity? I have checked out a few web sites that say yes???
How does the owner in an owner financing contract go about forclosing on the purchaser for non payment? Is an eviction the proper thing to do? How long can the purchaser stay in the house before foreclosure/eviction process can be started? How long does the process take for the house to become vacant? The house in question is in South Carolina. Both buyer and owner live in South Carolina.[/img]
Hi opondo,
Interest rates may be higher in case of owner financing. However, in some cases, the owners even charge the rate presently prevailing in the market.
Hi Rtjr,
You will have to contact a real estate attorney and he will let you know what type of documents/papers you and your buyer needs to sign.
Thanks
In an owner finance situation, can the property be put into the buyer's name to qualify for property tax deductions/exemptions. ie. Homestead exemption?
As a buyer, on an owner financed home at 7% interest, how does buyer go about paying extra money to principle so that no interest charges accumulate? Or am I 100% liable to pay all interest for the full sale amount of the home.
Hi nutben!
Welcome to forums!
As you don't have the required credit scores, owner financing will be a good option to buy a property. However, you should find out whether or not there is an existing mortgage on the property. If there is an existing mortgage on the property, then you should ask the seller to pay off that mortgage in full.
Feel free to ask if you've further queries.
Sussane
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
Hi Daisymae,
As far as I know, the legal documents for owner finance and lease to purchase are different. Nevertheless, you should contact a real estate attorney and he will guide you in this regard and let you take the right decision whether or not you can turn a lease to purchase into owner finance.
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
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
yes phil you need a lawyer...right away. you've been duped and the only way you'll be made whole is by finding out - from a lawyer - what recourse you have to fix the problem. go get yourself a good lawyer right quick!
the wife and i rent a home , in 12 months we were never late , we want the home but i dont have the credit , she wants to sell to us , she wants 280,000, maybe i can have come down some , i have 20,000 cash , what do you think,,, be honest,,,
As a buyer of land, how do i ensure that the land is free and clear of any liens? Also, how do I ensure the owner doesnt mortage the property after we have agreed to a price.
what do you think
what kind of loan consultant are you working with?
i know of no reason why two people who are engaged to be married wouldn't be able to transfer real estate one to the other by way of a gift of equity. an ordinary gift of funds has been allowable for as long as my memory goes back, and the only difference between the two (funds/equity) is the appellations we give them.
find a consultant who knows the rules is my best analysis of your situation.
I have been leasing a home for the past two years. My previous home was foreclosed on and this was the only option for me. My credit has recovered some but not to the extent that I could get another mortgage at this time. The owner of the home that i am leasing offered to owner finance it instead of leasing. Is this a good idea? I am skeptical.
Hi Rima,
You can send a certified letter to the buyer regarding the non-payment of dues and ask him or her to pay off the dues within a stipulated period of time. If the buyer does not pay off the dues along with the late fees within the stipulated period, then you can foreclose the property depending upon your owner financing agreement. Once you foreclose the property, you can send a eviction notice to the buyer and give him or her 3 days time to leave the property.
Thanks,
Jerry
Welcome myrna,
Your property should be free and clear in order to sell it off through owner finance. As you already owe a mortgage on your property, you won't be able to do a owner financing on it. If your lender comes to know that you've sold off the property through owner financing, he may call the loan due immediately.
Hi sassykitty,
You need to check out your owner financing agreement and find out what steps the seller can take in case you default the payments. If the seller is not following the clauses of the agreement, then you can take legal actions against him. However, if the agreement mentions that the seller can take action against you for 1 missing payment, then you've nothing to say in this regard. You will have to follow what your seller is asking you to do.
Thanks
Hi rgd!
Welcome to forums!
You can go for an owner financing in order to sell off the property but you should sign a proper agreement with the buyer. If the clauses of the agreement satisfy both you as well as your buyer, then only you should go for the deal.
Feel free to ask if you've further queries.
Sussane
If the property remains in your name, then you will be legally responsible for the insurance payments. However, you can negotiate with the buyer and check out if he is interested in paying off the insurance payments. Also, you should note that you should not owner finance the property as you already have a mortgage on it. That may be considered as illegal.
Hi Sussane,
Where do I start looking for owner financing? This all new to me!
Thank you!
The price I expect to be able to sell my home for will be limited by the amount of financing a bank will lend a buyer. That will be based on the appraisal, which is seriously hampered by foreclosures in the area. At today's low interest rates, buyer's ability to pay is not limiting. If I carry a 2nd that makes up most of the difference to what I have in the property, and the buyer defaults, can I just cancel the loan and take the tax write off? If I can, that would give me at least as much as my marginal tax rate that I could not have gotten otherwise. If the buyer pays, great. If not, I am still better off. Even though I cannot write off a loss on sale of the home, I could write off a loan to a buyer if that buyer defaults, yes?
Please "hook me up" with someone who is interested in owner finance. I would like a minimum of four acres in Bexar County with either 2 or 3/1 or 2. I have no problem with some repairs needed. I have horses and donkeys and I want them with me and not out in someone else's pasture. Because of where I work--mainly out of the northside of SA, I would prefer to be live maybe out Bandera Road. However, I am open to other areas. I am "really desperate" due to my new neighbors. I need a FOREVER home@
I am able to pay between 500-800 a month.
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?
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.
WHEN ENTERING INTO OWNER FINANCING CONTRACT AND THE OWNER IS FINANCING THE ENTIRE $45,000.00 @ 5% 20 YRS CAN I ASK THE OWNER TO DO ANY REPAIRS & UPGRADES BEFORE SIGNING THE CONTRACT? ALSO WILL INSPECTION OF THE PROPERTY BE DONE?
Hi!
Welcome to the forums!
As you are going for owner financing, you should draft an agreement in this regard. If the buyers miss more than 1 payment, you may proceed with the eviction process. However, that should be mentioned in the contract. You and the buyers will have to decide as to who will pay for the repairs, insurance and property taxes and get that mentioned in the agreement.
Feel free to ask if you've further queries.
Sussane
I am considering selling my home home using "owner financing". I still have a mortgage on this home. What about insurance responsibility, is it the buyer or the sellers responsibility?
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.
Hi brettk,
If you are purchasing the property for the first time in 3 years, then you will be able to get the first time homebuyer's tax credit. However, if you're refinancing a mortgage, you won't be able to claim homebuyer's tax credit. Moreover, if the seller already has a mortgage on the property, then it won't be a good option for him to owner finance the property as the lender can consider this agreement as illegal and can call the loan due immediately.
Take care.
Is it customary to get a down payment also, with the owner financing?
I own a property outright that I'm trying to sell. The buyer is interested, but wants to do Owner financing with about 35% down payment. A few questions.
1. What happens if they miss more than 1 payment? What are my options? Am I able to evict if necessary?
2. Who is responsible for repairs?
3. Who is responsible for insurance?
4. Who is responsible for property taxes?
to a guy that has bad credit and doesnt want to try for financing and i am charging him 9%. is this legal
down payment cannot be provided by a seller.
Hi Billy,
You should check out the owner financing contract in order to know the time period within which you need to [url=http://www.mortgagefit.com/refinance.html]refinance[/url] the loan. If that time period is over, then the owner can sell off the land contract to someone else. If you want to get back the property, then you will have to refinance the mortgage in your name immediately or else, you would lose the property.
Take care.
hello everyone
i want to buy the house i am renting now,the owner is willing to finance i only have to put $5000 down.the house price if $190K
my wife aand i dont have good credit now and can not afford for a loan...but i dont know if this option is good.
he is giving a interest rate of a 6.75 and he said we can do a balloon for 5 years...is this a good idea? has anyone neen in this situation? also what kind of contract do i have to get from him? :)
What type of items do an owner look at to determine to owner finance with a potential buyer. We are looking at a house right now and another couple is looking at it also. What is the deciding factor? We do not have the greatest credit but we do not have many expenses and we make a really good combined monthly income. We also don't owe much just our cars. His current home is paid off, but the other competeing couple still owes on their current home and have to sell it also.
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?
You can contact the county recorder's office or a title search company in order to know whether or not there is a lien on that property. Once you agreed to a price, draw up the mortgage documents as soon as possible. Thus, the property owner will not be able to take a mortgage on that property.