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 santaella,
If there is an exiting mortgage, it is better to not go for an owner financing on the same property. If the lender comes to know about owner financing, he might consider this as a fraud.
Thanks,
Jerry
If there is an exiting mortgage, it is better to not go for an owner financing on the same property. If the lender comes to know about owner financing, he might consider this as a fraud.
Thanks,
Jerry
hi'
I am looking into buying a fixe upper through owner finacining the sale price is for $30k and the seller is asking for $3000dp with 0%ints, payments of $750 and to be paid off in 36mths. I feel that its a pretty good deal but im not to sure what to look at, he is providing the lawyer for the contract for deed but i just found out there are property taxed owned in the amt of $1300 for the past 6yrs or so...what should i do???/
I am looking into buying a fixe upper through owner finacining the sale price is for $30k and the seller is asking for $3000dp with 0%ints, payments of $750 and to be paid off in 36mths. I feel that its a pretty good deal but im not to sure what to look at, he is providing the lawyer for the contract for deed but i just found out there are property taxed owned in the amt of $1300 for the past 6yrs or so...what should i do???/
Hi yesenia!
Welcome to forums!
You can appoint a lawyer yourself who will look into your interests and let you know whether or not you should go for the deal. However, if there are tax defaults, then you should ask the owner to pay off the taxes in full and then you should think about signing the deal with him/her.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
You can appoint a lawyer yourself who will look into your interests and let you know whether or not you should go for the deal. However, if there are tax defaults, then you should ask the owner to pay off the taxes in full and then you should think about signing the deal with him/her.
Feel free to ask if you've further queries.
Sussane
I found a home that has owner financing available. I really like this home but it will be about 4 months before I can occupy the home. how can I make it attractive to the seller to hold it for me? I would guess earnest money? the asking price is 100,000, how much earnest should I offer??Basically what kind of offer/ offers should I make to the seller so he wants to sell to me AND hold the house too???
I'm pretty new to all of this, and appreciate any and all advice.
Thanks!!
I'm pretty new to all of this, and appreciate any and all advice.
Thanks!!
If i purchase a home and the owner carries the note, can they do this if they owe a balance to a bank on the home?
Hi rtr,
Your query has been replied to in the given page:
http://www.mortgagefit.com/know-how/about51039.html
Take a look at it. I hope it will help you.
To Brian,
If the owner has a mortgage on the property, then he cannot sell off the same property using owner financing. If the lender comes to know about it, he may call the loan due immediately.
Thanks
Your query has been replied to in the given page:
http://www.mortgagefit.com/know-how/about51039.html
Take a look at it. I hope it will help you.
To Brian,
If the owner has a mortgage on the property, then he cannot sell off the same property using owner financing. If the lender comes to know about it, he may call the loan due immediately.
Thanks
My husband and I both have very good jobs, but our credit scores are not high enough to qualify for a morgage loan. Is owner finacing the best way to go? We have been in a rent home for five years and it only has one rr, we need a bigger home and I am tired of throwing money away on rent. Advice Help
Welcome Guest,
You can take steps to improve your credit score and after 6 months - 1 year, you can apply for a mortgage to buy a property of your own. However, if you wish to buy a home now, then you will have to go for owner financing.
You can take steps to improve your credit score and after 6 months - 1 year, you can apply for a mortgage to buy a property of your own. However, if you wish to buy a home now, then you will have to go for owner financing.
what is the process in paying interest while leasing an owner financed home?
Hi ramosrm,
If you want to owner finance a property for someone else, then you may charge similar rates and charges as prevalent in the market. However, if you wish, you may even charge a higher interest rate. But, please note that if you already have a mortgage on the property, then you won't be able to owner finance it.
Thanks
If you want to owner finance a property for someone else, then you may charge similar rates and charges as prevalent in the market. However, if you wish, you may even charge a higher interest rate. But, please note that if you already have a mortgage on the property, then you won't be able to owner finance it.
Thanks
As a buyer, on an owner financed home at 7% interest, how does buyer go about paying extra money to principle so that no interest charges accumulate? Or am I 100% liable to pay all interest for the full sale amount of the home.
Hi ramosrm,
As you've owner financed the home at a 7% interest, you will be liable for paying that interest. However, if you pay extra toward the principal, you will be able to reduce the time period to pay off the loan and this will help you in reduction of interest charges.
As you've owner financed the home at a 7% interest, you will be liable for paying that interest. However, if you pay extra toward the principal, you will be able to reduce the time period to pay off the loan and this will help you in reduction of interest charges.
the wife and i rent a home , in 12 months we were never late , we want the home but i dont have the credit , she wants to sell to us , she wants 280,000, maybe i can have come down some , i have 20,000 cash , what do you think,,, be honest,,,
what do you think
Hi nutben!
Welcome to forums!
As you don't have the required credit scores, owner financing will be a good option to buy a property. However, you should find out whether or not there is an existing mortgage on the property. If there is an existing mortgage on the property, then you should ask the seller to pay off that mortgage in full.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
As you don't have the required credit scores, owner financing will be a good option to buy a property. However, you should find out whether or not there is an existing mortgage on the property. If there is an existing mortgage on the property, then you should ask the seller to pay off that mortgage in full.
Feel free to ask if you've further queries.
Sussane