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 owned a property free and clear with is a better investment renting or owner financing.
Thank Greg
Thank Greg
Hi greg,
If you want to sell off the property in the long run, then owner financing will be a better option. However, if you want to keep the property as an investment, then you can opt for renting it.
Thanks
If you want to sell off the property in the long run, then owner financing will be a better option. However, if you want to keep the property as an investment, then you can opt for renting it.
Thanks
Is it true that the tax breaks available to new home owner with a traditional mortgage are not available in a seller-financed situation? Also, is it true that in a seller-financed/contract-for-deed agreement the buyer doesn't truly own the home?
Hi annie,
As far as I know, yes, it is true that all the tax breaks that are available to a new home owner with a traditional mortgage are not available in a seller-financed situation. In a seller financed situation, you will become the sole owner of the property only when you pay off the loan as per the agreement.
Thanks
As far as I know, yes, it is true that all the tax breaks that are available to a new home owner with a traditional mortgage are not available in a seller-financed situation. In a seller financed situation, you will become the sole owner of the property only when you pay off the loan as per the agreement.
Thanks
I'm in Colorado--when we wrote up RE contracts for seller finance, we capped it at going rate of 6.5%. However, there are predatory investors who want to finance it at higher rates 8% x 30 yrs---this makes it impossible to do a reasonable pay down/off-- Any advice on this predicament? Any laws?
If you're going for seller finance, then you won't have to get concerned about the predatory investors. You will have to pay the seller whatever is mentioned in your contract.
a friend purchased a mobile home. the purchase price was one thing but the written agreement was a lot lower. after moving in my friend found numerous problems which the seller has refused to fix. my friend wants to know which price they should pay, the one that oral agreement or the written one that both parties signed. this is a owner finance situation
Hi atloss,
Of course, the written agreement should be given importance and the amount mentioned there should be paid.
Thanks
Of course, the written agreement should be given importance and the amount mentioned there should be paid.
Thanks
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? :)
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? :)
Welcome Guest,
Owner financing is a good option if you don't have a good credit to take out a conventional loan. But you should check out if there is any other lien or mortgage on the property. Apart from this, you should also negotiate with the owner to reduce the interest rate.
Owner financing is a good option if you don't have a good credit to take out a conventional loan. But you should check out if there is any other lien or mortgage on the property. Apart from this, you should also negotiate with the owner to reduce the interest rate.
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?
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.
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.
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?
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.
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?
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?