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?
$200,000 land pickens, sc owner owes $80,000, (14 acres)he will sell me 2 acre , with existing well, septic and elec. for $35,000. owner financing how can this be done
In an owner finance scenario, what if the deal is done, and the seller goes bankrupt? Does the buyer lose the house?
i don't have an answer to that, tex. but it appears from what i read from other posters, that's a common problem.
it's way too simple to advise everyone to have legal representation, but look what happens when they don't. all too many of these issues could be rectified with counsel watching out for the parties involved.
it's way too simple to advise everyone to have legal representation, but look what happens when they don't. all too many of these issues could be rectified with counsel watching out for the parties involved.
I am a seller who is tried of wondering when the payments are going to come in and the hassle of keeping up with when and how much is paid. How could i get out of receiving payments
Hi anonymous,
I need to know a few things before I can answer your query. What sort of agreement did you have with the renter? Lease purchase or a normal rental agreement?
Thanks,
Jerry
I need to know a few things before I can answer your query. What sort of agreement did you have with the renter? Lease purchase or a normal rental agreement?
Thanks,
Jerry
wow...a seller/financer who is tired of keeping track of payments received.
why not just tell your borrower to stop making payments? that will make for a happy homeowner and it will solve your bookkeeping problem.
gee, maybe i should call my mortgage company and see if they're tired of keeping track of my payments. maybe they'd tell me to stop bothering them. i could handle that.
why not just tell your borrower to stop making payments? that will make for a happy homeowner and it will solve your bookkeeping problem.
gee, maybe i should call my mortgage company and see if they're tired of keeping track of my payments. maybe they'd tell me to stop bothering them. i could handle that.
I have a rent to own with a person who just died. There was no power of attorney granted to any of his heirs. My contract does state that the heirs must honor it.
My question is who do I make the check out to now? One of the daughers says make it to her but I'm not doing that since she has no legal standing.
My question is who do I make the check out to now? One of the daughers says make it to her but I'm not doing that since she has no legal standing.
anon, you may want to set up a meeting with all of the heirs to discuss this. i suppose you could, at least temporarily, make your checks out to the estate of the person. if you know who might be handling the estate - administrator, probate court, etc., that would be a good source of information on what to do next.
I had already thought about making it to "Estate of [name]. This just happened so it's hard to bring it up with the family at this point. We're friends as well as having this business arrangement. The viewing is tomrrow and I may be able to broach it then. Have to play it by ear.
And let me say I am not one to ever confuse friendship with business and I urged his daughter to get power of attorney when he became ill as he has many rental and owner financed propeties.
Thank you for the adivice and I will certainly pursue the avenues you suggested.
And let me say I am not one to ever confuse friendship with business and I urged his daughter to get power of attorney when he became ill as he has many rental and owner financed propeties.
Thank you for the adivice and I will certainly pursue the avenues you suggested.
if my name is on a deed through a owner finance contract. I would like to get out of this house since it has become a major MONEY PIT but i am not sure how to tell other mortgage companies about my prior home ownership. Am I a home owner or not??
Hi kdd,
Are you listed on the title to the property? If you are, then you definitely are a owner of the property. But I would like you to explain the situation in detail so I can provide you with a better answer.
Are you listed on the title to the property? If you are, then you definitely are a owner of the property. But I would like you to explain the situation in detail so I can provide you with a better answer.
My fiance and I are looking at a home that owner financed. I have reservations about it even though I know of someone that has gone through the process. Is owner financing a good of a deal as advertised and can we get the seller to make repairs to the property before we buy?
Hello,
I am not clear on a question about owner financing. I have a property in Georgia, and I have a buyer. However, I still have a mortgage balance on the property, but the potential buyer wants to owner finance. I bought this property using this same method. Yhe seller had a balance. Is this legal and how do Iowner finance with a mortgage balance. Thanks
I am not clear on a question about owner financing. I have a property in Georgia, and I have a buyer. However, I still have a mortgage balance on the property, but the potential buyer wants to owner finance. I bought this property using this same method. Yhe seller had a balance. Is this legal and how do Iowner finance with a mortgage balance. Thanks
im looking at a 500K house worth 725K Owner owns it free and clear....Could i take out a loan against the house for 150K and have the owner carry the rest
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@