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 I offer owner financing to the tenent of a single family property I own, will I owe capital gains taxes when the sales agreement is made, or when the property is paid in full?
If it's your principle residence, then you will not owe the capital gains tax as far as my knowledge. Otherwise, you will have to pay the taxes.
If I purchase a home through owner financing can I deduct the interest from my taxes
I think you can deduct the interest from the taxes.
what can the owner do to me if i want to give him back his property.
His property is free and clear and he does not owe any money on it.
His property is free and clear and he does not owe any money on it.
If I am almost in my first year of paying can I still apply for one of these programs. Would I have to pay a higher percentage rate.
Hi,
To patriciaa,
If the property is free and clear, then you can give it back to him. I don't think in that case, he can claim any judgments.
To aquarius,
You can definitely apply for bankruptcy but you will have to go for a Means Test. To know more about Means test, check out the following link:
http://www.mortgagefit.com/bankruptcy/chapter7-chapter13.html
Take Care
To patriciaa,
If the property is free and clear, then you can give it back to him. I don't think in that case, he can claim any judgments.
To aquarius,
You can definitely apply for bankruptcy but you will have to go for a Means Test. To know more about Means test, check out the following link:
http://www.mortgagefit.com/bankruptcy/chapter7-chapter13.html
Take Care
I AM IN A LEASE/PURCHASE,I AM NO SURE OF SOME OF THE TEARMS,WRITTEN BY THE MANAGEMENT CO.SHOULD I SEEK A REAL ESTATE LAWYER, TO EXPLAIN THEM TO ME BEFORE I AGREE TO PURCHASE?
Hi MS MILLER,
You can definitely take the help of a lawyer to explain the terms and conditions of the agreement to you. You can even ask the management company to do the same for you. Once you understand the documents fully, then go ahead and sign them.
Thanks
You can definitely take the help of a lawyer to explain the terms and conditions of the agreement to you. You can even ask the management company to do the same for you. Once you understand the documents fully, then go ahead and sign them.
Thanks
who gets to write off the interest on a carry loan
You will have to contact your lender and check out with him. I guess it will be decided by the lender.
gosh...if you're going to go by the "guess" of a "guest" as to who can take a deduction for interest paid on a mortgage, then you'll be in trouble, nicole.
i'm not sure what you're referring to as a "carry loan" but if you pay the interest...if your social security number is shown on the mortgage on which you pay the interest...then you can claim it.
it is absolutely not up to a lender to tell you this information. the irs is the authority on tax deductions and that's where you ought to go with specific questions. you can simply go online and ask questions at irs.gov.
i'm not sure what you're referring to as a "carry loan" but if you pay the interest...if your social security number is shown on the mortgage on which you pay the interest...then you can claim it.
it is absolutely not up to a lender to tell you this information. the irs is the authority on tax deductions and that's where you ought to go with specific questions. you can simply go online and ask questions at irs.gov.
i am closing the estate of a person who financed a mortgage on some property in maine. am i right to think that it is allowable for me to call in the mortgage, which still has about another four years? the lawyer is telling me he doesn't think i can, which will just be a big headache if i have to keep the estate open for four or five more years. my feeling is that the person who owes the money should refinance through a bank (they will have land equity, as they are inheriting a great lump of property beside the house they bought) and that i shouldn't do any favors by continuing on for five more years, aside from the fact that most of the inheritors of the estate are quite elderly and may not live long enough to get all the money from the estate that they are supposed to get.
the lawyer is trying to tell me that we don't have the right to call in the mortgage but i am not sure that he is correct.
the lawyer is trying to tell me that we don't have the right to call in the mortgage but i am not sure that he is correct.
I am closing the estate of a person who financed a mortgage on some property in Maine. Am I right to think that it is allowable for me to call in the mortgage, which still has about another four years? The lawyer is telling me he doesn't think I can, which will just be a big headache if I have to keep the estate open for four or five more years. My feeling is that the person who owes the money should refinance through a bank (they will have land equity, as they are inheriting a great lump of property beside the house they bought) and that I shouldn't do any favors by continuing on for five more years, aside from the fact that most of the inheritors of the estate are quite elderly and may not live long enough to get all the money from the estate that they are supposed to get.
The lawyer is trying to tell me that we don't have the right to call in the mortgage but I am not sure that he is correct.
The lawyer is trying to tell me that we don't have the right to call in the mortgage but I am not sure that he is correct.
$2000,000 land Pickens sc owner owes $ 80,000. 14 acres. he will sell me 2acres for $35,000. has well septic and elec. can he do owner financing with existing loan balance on the 14 acres?