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.
Possible reason for sellers to go for owner financing/owner finance:
[list:288da8839f][*:288da8839f]Tax Deferment:
Allows the seller to postpone their tax liabilities and even in some cases reduce the liability.
[*:288da8839f]Current Income:
Such a financing method becomes a good source of income after the seller retires.
[*:288da8839f]Risk Coverage:
It provides the seller with a well-structured agreement that protects him from any risk on account of default by the purchaser. In case the purchaser stops making monthly payments, the seller can conduct a foreclosure through which he can sell the home again at full market price.
[/list:u:288da8839f]
Owner financed deals or seller financing options are not widely available but can be a good deal for the buyers who has some problems in qualifying for a mortgage.
Also it becomes helpful when there is shortage of money for a part of the payment to buy the house.
James Hogg
Owner financing or seller financing is a good option for the citizens outside US who face problems with the policies while searching for conventional financing.
Especially in today's market when houses can be booked on the internet, people may utilize the advantage to book even from outside US.
The opportunity is not too many, but it is gaining momentum today.
Home equity skimming is a kind of fraud in owner financing or owner finance and the sellers should be aware of it.
In owner financing the seller finances the sale for the buyer. A small down payment is made by the buyer after which the house gets sold and the deed is recorded.
Now, some times it happens that the buyer goes to a bank and takes out a [url=http://www.mortgagefit.com/home-equity.html]home equity loan[/url]. After he gets the loan, he simple disappears with the money.
So, the seller must record the lien on the new deed. This will prevent any bank to grant a home equity loan the buyer.
James
Have a small deposit. [10 - 15k] Want to own home through owner financing option.
Hi Gwin,
Welcome to MortgageFit Forums,
It's good that you have a fair amount of deposit. That is really going to help you in your home purchase. At least you don't have to borrow the entire purchase price. You can look out for owner financing/owner finance for the remaining amount other than the deposit. If you can shop around, you will find several such sellers offering owner financing options. Just negotiate properly with the seller before you accept such an option.
Best of luck for you new home.
Thanks,
Caron
I have my home on the market..but I also have a mortgage balance. A buyer asked about owner financing. How does that work when I have an outstanding balance on my current mortgage.
I think with the outstanding balance on loan you cannot go for owner financing/owner finance. Though i am also bit confused on the issue.
Hope someone can clear our doubts.
Yeah guys, let me clear your doubt.
1st the outstanding loan needs to be cleared then only you can think of owner financing or owner finance.
As until n unless the whole amount is paid in legal books you don't have the right to sell it to someone.
Hope i have been able to clear the doubts.
Ok....the above information is incorrect. More than likely per your note you can't assign the interest in the property in other word you can't put them on title. You would not want to put them on title either. If you put them on title and they stop making payment you have to go through the foreclosure process which is time consuming and exspensive. You can write a LEASE with an option to purchase 12 months, or longer, later. Then it becomes an eviction process not a foreclosure. During the time of the lease it's like any other rental property you collect the rent and you make your mortgage payments. The requirements are simple.
A. Establish the purchase price (which can and should be more than you owe)
B. Write a lease contract with an option to purchase at the above price
C. The renter must document payments via cxl checks for 12 months or some other verified form of payment like money orders etc....
D. After the 12th month the renter can do a lease option refi and the title company must get a notarized payoff demand from the seller.
E. The renter gets with a mortgage company that treats the transaction like a refi so the appraised value can be used to determine actual loan to value.
F At closing the seller gets the difference between actual payoff and the existing lien and the renter is placed on title.
These types of transactions occur every day.
There's no reason why I can't ask for 10% to 15% down now, correct? My buyer is divorcing in the middle of our contract and she feels she will not get good financing terms at this time. I want a lease with option to buy because it's quicker to get my hands on some of my equity that I needed way before now because of the delays with their divorce. She told me it was her income that made their lease payments on time up to this point. I believe she has good financial health.
Hi,
You can ask for the down payment as long as she doesn't have any problems with the payment, since I guess you don't want to lose her as a buyer.
But you told that you are in the middle of the contract. Why are you asking for a down payment now?
Regards,
Blue
she had given me earneast money,but, did not sign our contract (no agent involved) was suppose to get her own financing but her husband left her now she's telling me she will be purchasing the house on her own, purchase price is $218500. She's implying she can't get financing on her own or acceptable terms. But, she still wants to buy. And could I owner finance. I don't have the money or equity to owner finance. So I'm suggesting to her 12 mo lease with option to buy. I have a lawyer helping me. Is it true about her being able to get a refinance loan in 12 mos? Doesn't that have a little more benefit than an initial finance? She said she has the down payment. My contract will certainly give her credit for that. It maybe risky for me but I'm considering dropping the lease payment to just cover the mortgage payment &giving her full credit for amounts applied to principle during the 12 mos. She takes excellent care of the home.
Hi,
Now, your query indicates that you like her as a potential buyer. But since this is a matter related to real estate, you should be careful about that always.
It's always a good idea to take the help of a lawyer and proceed with the terms. If she has the money for a down payment, then I don't think there should be any problem.
But you should prepare the contract papers well and that too under the guidance of your lawyer. Also, do try to find out how far she will be able to refinance.
If your contract papers are strong enough, then chances of your risk minimizes.
Regards,
Blue
Hi,
Welcome to MortgageFit Forums.
You may go for lease with an option to purchase after 12 months and that is a normal process.
If she can arrange the financing then there will be no problem and if she can't then you can get it back.
But be very careful to prepare the contract papers and involve your lawyer in the process.
God bless you.
For MortgageFit,
Samantha
Thanks so much for your responses. I am still confused about one issue. How does is it that when she exercises the option to buy after say 12 mos, she can get a [url=http://www.mortgagefit.com/refinance.html]refinance[/url] loan instead of an initial finance. I know that a refinance loan to value is based off the appraised value not the purchase price and that has a better outcome. When the seller makes a demand to the title company- what does that mean? There's just a notarized demand, that's it? Does seller have to money in hand to do this?
Does seller have to money in hand to do this?
On this I think yes, the seller has to have some money.
Hi,
There are many lenders to treat a lease option, after 12 months, as refinance - as if you were on the deed.
Then it will be considered as a land contract or contract for deed refinance.
Seller's demand to the title company is a notarized demand and it requires money in hand to do this.
James
in an owner finance can you put your down at the end of paying off the loan and keep making payments until the down is paid
Hi,
The down payment is the cash amount which a buyer pays prior to purchasing the property. And, if he fails to pay the cash at the time of purchase, the seller includes the amount with the loan offered by him.
So, I don't think that the seller will accept such a proposal. Rather you can make a small amount of down payment or even a zero down payment and accept a higher rate of interest in return from the seller.
Thanks,
Caron.
I'm the buyer: can the terms/conditions of my loan change without my consent if the seller sells the loan?
Hello Cynthia,
As far as I know, the seller may sell the note without the buyer's consent and he is given a notice about this change. But the terms and conditions cannot be changed without the buyer's consent. Even if the investor wants to make such changes, he should inform the buyer about that.
was curious if my wife and I sell our house and carry the note , total profit is less than 500,00. are we still free from capito gains tax, even if we fincance the loan for 20 years ??
Hi john_hig,
Welcome to this forum.
I think for the married joint filers, homeowner can get exemption from capital gains taxes for up to $500K under the Taxpayer Relief Act of 1997. And your profit is less than $500K. So you can get the exemption.
Thanks,
Larry
Hi
I am about to purchase a house from an owner who is going to finance for me... he owes $225K, and we agreed on $265K selling price, with $15K down... he is refinancing his current loan, and going to carry the remainder as well... After reading all of the replies, I am thinking that if the owner still owes on the house, that this may not be a possibility? My email is tonywindle at gmail.com if anyone wishes to contact. THANKS!
Hello Twindle,
Is the seller doing the refinance in his name? In that case, I don't think the lender will give his consent to transfer the ownership rights to you.
It will be better if you talk to the lender first and then decide.
Hi Twindle,
Welcome to our forums.
What I understand from your post is, the seller will do an owner financing for an amount worth $265K and you'll pay $15K as down payment. Now, the seller has to repay $225K, which can be done using the sale price but right now he's not getting the entire price from you because you will be making that in installments. So, he wants to refinance the house in his name, is that ok?
But the problem is, if he refinances the loan in his name, the lender would want him to be on the title rather than allow him to sell off the home to you or anyone else. So, refinancing won't be the possibility here.
Another way out is, you assume the mortgage while buying the home, but then there will be two mortgages for you, one for the refinance loan and the other the owner financing (which you will perhaps treat as a mortgage and not a typical contract for deed). And, I don't know how easy it will be for you to manage two loans. Moreover, the lender will need to approve you before allowing you for the assumption.
Good luck!
Hi - thanks for the responses... looks like we are doing a wrap around & the escrow company is handling the paperwork and paying the lender. I guess the risk is if the lender finds out, and 'calls the mortgage' which I am not really sure what that means... cheers!
Yes twindle, it looks almost like a wrap around loan. But if the lender comes to know of it, well then, he may call the loan due using the due on sale clause. So, there is risk involved here. But as long as you make the payments to the seller in time and the seller makes it in time to his lender, there's no chance that the seller's lender may demand immediate payment from the seller.
Thanks
Lease to purchase or a land contract would be options to for the buyer to purchase this home.
If you hold a first mortgage on a property can you still owner finance for 100% of the first mortgage as a second to a propective buyer???I.E. be the middle man for the bank
Santos,
What I can understand from your query is,
You have a home with a mortgage on it and wish to sell it off. The buyer will not assume the loan but consider it as owner financing - that is, you will be paying for the loan with the funds paid by him every month as a part of the owner financing deal. Thus, the owner financing will act as a second lien on your property.
However, I doubt whether your lender will allow for it. This is because when you sell off the home, either you are expected to pay off the loan or else let the buyer assume the loan with the approval of the lender. And, it is better not to hide the owner financing deal, as the lender can charge you a penalty if he comes to know of it because he has invested into the property and he hasn't received the entire payment yet.
Moreover, if your loan contract has a due on sale clause, then the lender might immediately ask for the entire balance once you sell off the property.
Please let me know if that's what you have asked for.
May God bless you.
Samantha
Hello everyone,
There is a simple solution to this problem. The easiest way to accomplish this would be with a rent to buy. The buyer would simply sign a lease just like a standard rental agreement would look. In addition you would attach an addendum which states that on such and such a date and for this much money A. will buy property from B. That way everyone is protected and nobody runs the risk of losing seriously. There are obviously still risks but this way the original lender can't call a "due on sale" clause. And the new buyer has a legitimate stake in the purchase (if he/she can qualify through a lender). You can still put money down or structure the purchase how you see fit.
Thanks Eric. It is indeed a good way to avoid risks on account of the due and sale clause. Instead of having a second lien, it is better to go by this method. Thre best thing is, it offer protection to all parties involved in the transaction.
I should add that local laws will have something to do with the determined agreements as well. Rent to buy as I have shown is not legal everywhere, just like lease options and land contracts. Different local laws can have an effect on what financial tools you use. Just wanted to throw that in, but not wanting to complicate the matter. Oops, Looks like I just did. So with that said it is always a good idea to consult with a reputable local attorney.
I am buying some acreage from the seller and he is financing. Can he ask for payments to begin before we get the land surveyed and have the closing? We signed the purchase contract in November and we were supposed to have the closing in mid December but we could not because the surveyor could not get to us until this February. Now the seller says we forfeited because we did not make a payment in January and another payment is due at the end of this week. The purchase agreement says that interest will accrue starting December 15 and payment begins January 15 and on the 15th of each month after that. Are we supposed to have made payments in Jan. and Feb. even though we have not had a closing?
Hi Guest,
Welcome to our community forums.
I think everything should go by the contract. If your contract says payment should begin in January, it should start then only. But does your contract say anything about an upfront payment? may be the seller is asking for an upfront payment in the form of down payment.
However, if the closing is not yet done, then the monthly payments should not start. The seller should have amended the contract then. He can at least ask for the down payment but not the monthly payments. I think you should have a straight talk with him and if he's not willing to listen simply stay out of this contract, if possible or else seek legal advice from an attorney.
Regards,
Jessica.
I HAVE A QUESTION. IM NEW TO SELER FINANCING AND I HAVE SOMEONE WHO'S INTERESTED IN DOING SELLER FINANCING WITH ME B/C IM NEW TO THE COUNTRY AND DONT HAVE ALOT OF CREDIT. I KNOW THAT THE SELLER OWES MORE ON THE HOUSE THAN WHAT THEY WANT TO SELL IT TO ME FOR. IT SOUNDS LIKE A GREAT DEAL. BUT IM WORRIED AND WONDERING HOW CAN I BE COVERED TO MAKE SURE I OWN THE HOME WITH A CLEAR TITLE OR SOME KIND OF INSURANCE? SO I KNOW NO ONE CAN TAKE THE HOME FROM ME?
Hi,
i've already replied you at http://www.mortgagefit.com/shortsale/owner-financing.html . Please have a look at it.
Who would you go to that would handle paperwork to make an owner finance deal legal and on paper?
Welcome madamx,
I feel you should contact an attorney. He will handle the paperworks to make the deal legal.
he said he would owner finance for the 20 years he has left on the house what happen after he pay it off do the deed go in my name
Hi Guest.
Are you the owner of the property? If so are you ready for the owner financing? Now the buyer will get the property on his name after paying off the loan but if he cannot pay the loan off then you can even foreclose.
BTW is the buyer want to assume the loan? You need shed a bit more light on this so that we can help you better.
Best of luck,
Larry
A note broker presented a contract to my seller. He is a bad scenario? The owner/seller has a first mortgage on the property for $110,000. We create a promissory note for the sale price of $131,000.00 with a 360/month 7.5% interest rage. The promissory note is never registered or recorded but the tenants/borrowers have occupied the property on a lease/purchase contract for 24 months. The seller gives back 3% for down payment. The unrecorded promissory note and seller financing contract were negotiated with a note buyer and he offers $80,000 for the promissory note. Who pays off the first lien or is it really going to be paid off by the new buyers. Does the tenant/borrower on the promissory note have to be present for the transaction. Does the seller/owner financing have to notify the lender that he sold a promissory note? Any comments.
Thanks
Donna
Donna if you are one of the principals in that scenario seek out a RE atty what it sounds like is the seller is trying to double the money and is creating a fraudulent note. If you are the buyer I would be leery as it sounds like you could end up owing on 2 notes. I am not sure as I have read multiple times and still am not clear on what is taking place... a few hundred now or thousands later?
Get an Atty.
Brian
We have been leasing a house for 2 years, we do not have the down payment nor the credit to purchase the home,yet.......can the owners, Owner Finance, if they have a loan on the home? If so, how would that work and what would we be expected to do? What would be the best way to get in this home?
Welcome Guest.
In this financial turbulence, if you don't have very good credit, then I would suggest you not go for the loan. Try to improve your credit first. How bad is your credit? Check out the Credit Repair Tool to analyze and repair your credit.
Hope it helps. Ask the community if you have any more questions
Hi guest,
Owner financing is a good alternative to traditional loans especially when you credit isn't good enough and you need to have a home of your income. But when it comes to owner financing, you're dealing with a seller and not a third party lender. So, make sure that you sign on all required legal documents and read the fine print prepared by the seller's attorney. It's best if you can get the contract reviewed by an attorney.
Since the seller has a loan on the home, does he intent to pay it using your rent payments or does he want you to assume the loan later on? verify this because as it is chances are less that you'll be allowed to assume the loan by the lender who've provided it. This is because your credit isn't good. Moreover, ask the seller if his lender has no problems if you enter into an owner financing contract with the seller. This is indeed important as the lender may ask the seller for the unpaid balance if he violates terms and conditions stated on the loan contract.
I hope you understand there are legal complications here. So, you need to know everything about the seller's transaction with the lender before you make a deal with him.
Regards,
Jessica
My client has this land that he has, wanted to sell and needs to create a(an)
owner-finance or exchange for paper. What is the process? Do you do this service
Welcome beverly.
The seller goes for Owner financing if the buyer doesn't have good credit and cannot get the loan to purchase the property. It helps the owner to sell the property quickly.
This is a community which helps people with answer and suggestions to myriads mortgage related and other financial questions. So I feel you should contact with a real estate agent to do the service for you.