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?
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 refinance 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.
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
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.
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.
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
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!
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.
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!
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
Thanks
Lease to purchase or a land contract would be options to for the buyer to purchase this home.