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?
A query similar to yours has been answered in the given page:
http://www.mortgagefit.com/loantalk/pitfalls-sellerfinancing.html
Take a look at it. Hope it helps you.
http://www.mortgagefit.com/loantalk/pitfalls-sellerfinancing.html
Take a look at it. Hope it helps you.
My brother did the mortgage for me 6 years ago because I did not qualify. I have been making the payments to him then he makes the payment to the mortgage company. I am not getting ready to do my own financing on the home FHA loan will work. Can you help me figure out how this works? Purchase price 75K 6 years ago, balance on the loan is 54K now.
Inasmuch as you didn't really purchase the property six years ago, and it remains in your brother's name, you cannot refinance with a new loan at this time. You'd need to do a purchase-money mortgage. Perfectly frankly, I've never been asked to do such a loan as your circumstances represent. I'm hopeful we get responses here from some who have done so. But my stance, nevertheless, is this: speak with a lender as soon as you can and describe the circumstances. You may be able to render the idea that you went to contract six years ago and that all payments in the interim period have been down payment monies. My suspicion is that you'll be asked to create a brand new purchase agreement, and you can show on that contract all your payments as representative of down payment.
I would also imagine that you're going to have to be able to produce documentation that verifies what you've said, specifically that you've made six years' worth of payments toward this $75000 home.
Is the value still $75000 or is it more, or less? That's an important factor, of course.
The first step is to wait for another response or two to your query here. I hope you'll hear from someone with personal experience to help guide you. The next step after that is to get with a mortgage professional to discuss what you need to do to obtain a new mortgage.
I would also imagine that you're going to have to be able to produce documentation that verifies what you've said, specifically that you've made six years' worth of payments toward this $75000 home.
Is the value still $75000 or is it more, or less? That's an important factor, of course.
The first step is to wait for another response or two to your query here. I hope you'll hear from someone with personal experience to help guide you. The next step after that is to get with a mortgage professional to discuss what you need to do to obtain a new mortgage.
Im an owner and will be owner financing my property and need software or someone to contact to do the payments and interest where do i search
I don't think there is a software available for owner financing. You can contact an attorney and he can help you in drafting an agreement for the transactions. As far as payments are concerned, you can go for a fixed rate mortgage (FRM). You can check out the present market rates for FRM and charge accordingly to the buyer. You can use the FRM calculator available on this website in order to decide upon the payments.
I bought my parents home for 1$ back in 1992.i want to sell it now.It"s worth 300,000.00.lived in it since i bought it.i would like to claim the 250,000.00 tax free once in your lifetime deal , uncle sam offers.i am 51 years old. is this possible?
Hi bud,
You will be able to claim the lifetime gift tax exemptions. You need to contact a tax adviser and he will be able to help you in a better way in this regard.
Thanks
You will be able to claim the lifetime gift tax exemptions. You need to contact a tax adviser and he will be able to help you in a better way in this regard.
Thanks
I have been leasing a home for the past two years. My previous home was foreclosed on and this was the only option for me. My credit has recovered some but not to the extent that I could get another mortgage at this time. The owner of the home that i am leasing offered to owner finance it instead of leasing. Is this a good idea? I am skeptical.
Hi takeem,
It is a good idea to purchase a property through owner finance. You and the present owner of the property should sign an agreement related to the terms and conditions of the owner financing. You should take steps to improve your credit and once you have better scores, you can refinance the mortgage with any lender.
Thanks
It is a good idea to purchase a property through owner finance. You and the present owner of the property should sign an agreement related to the terms and conditions of the owner financing. You should take steps to improve your credit and once you have better scores, you can refinance the mortgage with any lender.
Thanks
As a buyer of land, how do i ensure that the land is free and clear of any liens? Also, how do I ensure the owner doesnt mortage the property after we have agreed to a price.
You can contact the county recorder's office or a title search company in order to know whether or not there is a lien on that property. Once you agreed to a price, draw up the mortgage documents as soon as possible. Thus, the property owner will not be able to take a mortgage on that property.
should you tell owner all the things you see wrong with the house before owner draws up owner financing agreement?
Should you tell owner all the things you see wrong with the house before owner draws up owner financing agreement? or should you wait until the owner draws up a contract, then sit down at the table and negotiate the price because of the roof, or landscaping, etc.
Without a doubt, you should bring up everything you notice that you consider an issue with the home - before a contract is prepared. Your "owner/financier" will probably have a lawyer prepare the contract, which would necessitate a fee; so changes after the fact will also necessitate a fee. Why would you want to the owner to go back and re-do the contract after the fact? Get everything on the table upfront, and both parties will be happier with the outcome.
hi melissa, i'm just wondering if you can get a home equity loan from a bank if you are owner financing your home?