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?
hi magoo,
a person should go for owner financing only if he or she does not have an existing mortgage on the property. the seller will be considered as the lender for the buyer and the buyer will have to make regular payments to the seller. as per the owner financing contract, the buyer will have to refinance the mortgage within a given period of time.
thanks
a person should go for owner financing only if he or she does not have an existing mortgage on the property. the seller will be considered as the lender for the buyer and the buyer will have to make regular payments to the seller. as per the owner financing contract, the buyer will have to refinance the mortgage within a given period of time.
thanks
I did a little research and I came across a lot articles about owner financing and it warns you about most of them being scams! Is it true? My landlord decided to short sale the property I am renting from him and I asked if it was possible for me to stay at the property till it sells, We keep the house immaculate with beautiful furniture so I thought the house would sell faster for him but he totally refuse to the offer! He said the only way he'll llet me stay is if I pay his mortgage payments which they are way over $3000 dollars a month lol...incredible!
I am in the process of having my house foreclosed due to a separation/divorce. I would like to buy a house since I have been renting for over four years but cannot qualify. My mom has said that she would consider purchasing a house and I could "buy" it from her. Basically, I would make the payments and would be responsible for all the repairs. The question is, I would want to be able to write of the interest that I am paying so would we do owner financing? If she buys it and we do not do owner financing, how would it affect her if she gets to write off the interest but also has to show a rental income, although that would be none since my payments would be whatever the mortgage payment is?
Welcome Annette,
You will have to contact a tax adviser and check out if you will be able to deduct the interest payments if you go for owner financing. However, if your mother's name is on the mortgage and the property, then she will be able to deduct the mortgage interest payments on her taxes.
You will have to contact a tax adviser and check out if you will be able to deduct the interest payments if you go for owner financing. However, if your mother's name is on the mortgage and the property, then she will be able to deduct the mortgage interest payments on her taxes.
I am to sell my home to someone in a few months. He has already agreed to pay me some earnest money. What forms do I need to have him sign acknowledging his intent and also receiving his earnest money? Does it have to be very detailed?
Thank you.
Thank you.
Hi Rtjr,
You will have to contact a real estate attorney and he will let you know what type of documents/papers you and your buyer needs to sign.
Thanks
You will have to contact a real estate attorney and he will let you know what type of documents/papers you and your buyer needs to sign.
Thanks
Can you do a lease to purchase and then when the time ends turn it into an owner finance loan ? This is what we want to do and we need to know what legal documents to do and a lot of other questions? how can I contact you or someone on your staff?
Hi Daisymae,
As far as I know, the legal documents for owner finance and lease to purchase are different. Nevertheless, you should contact a real estate attorney and he will guide you in this regard and let you take the right decision whether or not you can turn a lease to purchase into owner finance.
Thanks,
Jerry
As far as I know, the legal documents for owner finance and lease to purchase are different. Nevertheless, you should contact a real estate attorney and he will guide you in this regard and let you take the right decision whether or not you can turn a lease to purchase into owner finance.
Thanks,
Jerry
i've agreed to sell my property. can i skip the agent to save money? how do i go about writing a contract? should i use escrow?
Welcome acorn,
You can sell off the property without taking any help from the agent. This will help you in saving the commission which you had to otherwise pay to the agent.
You can sell off the property without taking any help from the agent. This will help you in saving the commission which you had to otherwise pay to the agent.
The price I expect to be able to sell my home for will be limited by the amount of financing a bank will lend a buyer. That will be based on the appraisal, which is seriously hampered by foreclosures in the area. At today's low interest rates, buyer's ability to pay is not limiting. If I carry a 2nd that makes up most of the difference to what I have in the property, and the buyer defaults, can I just cancel the loan and take the tax write off? If I can, that would give me at least as much as my marginal tax rate that I could not have gotten otherwise. If the buyer pays, great. If not, I am still better off. Even though I cannot write off a loss on sale of the home, I could write off a loan to a buyer if that buyer defaults, yes?
Hi Guest!
Welcome to forums!
You will have to contact a CPA and take his/her help in this matter. The CPA will go through your situation and let you know whether or not you'll be able to get a tax write off if your buyer defaults.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
You will have to contact a CPA and take his/her help in this matter. The CPA will go through your situation and let you know whether or not you'll be able to get a tax write off if your buyer defaults.
Feel free to ask if you've further queries.
Sussane
When buying a lot(land) with owner finance, what are good questions to ask during closing?
When you go for owner financing, you should check out the value of the property. You should ask the landlord about the rate of interest that he or she will be charging for the loan. You should also read the owner financing agreement in full in order to know the terms and conditions of the deal.
can I buy a house owner finane with an existing mortgage