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Owner financing: A win-win deal for both buyer and seller

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?

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.

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 -

  1. Easy qualification criteria
  2. 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.

  3. Tailor-made financing
  4. 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.

  5. No/low closing costs
  6. 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.

  7. Faster closing
  8. 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 -

  1. Highest price
  2. 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.

  3. Tax saving benefits
  4. 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.

  5. Monthly cash flow
  6. 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.

  7. Selling a hard-to-sell property
  8. 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.
Related Readings

Related Forum Discussions

Possible reason for sellers to go for owner financing/owner finance:

  • Tax Deferment:
    Allows the seller to postpone their tax liabilities and even in some cases reduce the liability.

  • Current Income:
    Such a financing method becomes a good source of income after the seller retires.

  • 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.
Posted on: 01st Dec, 2005 09:54 pm
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
Posted on: 02nd Dec, 2005 08:26 am
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.
Posted on: 08th Dec, 2005 04:38 pm
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 home equity loan. 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.

Posted on: 27th Dec, 2005 11:59 am
Have a small deposit. [10 - 15k] Want to own home through owner financing option.
Posted on: 05th Feb, 2006 07:03 pm
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.

Posted on: 05th Feb, 2006 08:14 pm
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.
Posted on: 14th Feb, 2006 06:37 am
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.
Posted on: 14th Feb, 2006 06:52 am
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.
Posted on: 14th Feb, 2006 07:04 am
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.
Posted on: 14th Feb, 2006 09:47 am
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.
Posted on: 17th Mar, 2006 08:25 am

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?

Posted on: 17th Mar, 2006 08:44 am
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.
Posted on: 17th Mar, 2006 09:46 am

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.

Posted on: 17th Mar, 2006 10:15 am

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,
Posted on: 17th Mar, 2006 10:21 am
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