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?
If you hold a first mortgage on a property can you still owner finance for 100% of the first mortgage as a second to a propective buyer???I.E. be the middle man for the bank
Santos,
What I can understand from your query is,
You have a home with a mortgage on it and wish to sell it off. The buyer will not assume the loan but consider it as owner financing - that is, you will be paying for the loan with the funds paid by him every month as a part of the owner financing deal. Thus, the owner financing will act as a second lien on your property.
However, I doubt whether your lender will allow for it. This is because when you sell off the home, either you are expected to pay off the loan or else let the buyer assume the loan with the approval of the lender. And, it is better not to hide the owner financing deal, as the lender can charge you a penalty if he comes to know of it because he has invested into the property and he hasn't received the entire payment yet.
Moreover, if your loan contract has a due on sale clause, then the lender might immediately ask for the entire balance once you sell off the property.
Please let me know if that's what you have asked for.
May God bless you.
Samantha
What I can understand from your query is,
You have a home with a mortgage on it and wish to sell it off. The buyer will not assume the loan but consider it as owner financing - that is, you will be paying for the loan with the funds paid by him every month as a part of the owner financing deal. Thus, the owner financing will act as a second lien on your property.
However, I doubt whether your lender will allow for it. This is because when you sell off the home, either you are expected to pay off the loan or else let the buyer assume the loan with the approval of the lender. And, it is better not to hide the owner financing deal, as the lender can charge you a penalty if he comes to know of it because he has invested into the property and he hasn't received the entire payment yet.
Moreover, if your loan contract has a due on sale clause, then the lender might immediately ask for the entire balance once you sell off the property.
Please let me know if that's what you have asked for.
May God bless you.
Samantha
Hello everyone,
There is a simple solution to this problem. The easiest way to accomplish this would be with a rent to buy. The buyer would simply sign a lease just like a standard rental agreement would look. In addition you would attach an addendum which states that on such and such a date and for this much money A. will buy property from B. That way everyone is protected and nobody runs the risk of losing seriously. There are obviously still risks but this way the original lender can't call a "due on sale" clause. And the new buyer has a legitimate stake in the purchase (if he/she can qualify through a lender). You can still put money down or structure the purchase how you see fit.
There is a simple solution to this problem. The easiest way to accomplish this would be with a rent to buy. The buyer would simply sign a lease just like a standard rental agreement would look. In addition you would attach an addendum which states that on such and such a date and for this much money A. will buy property from B. That way everyone is protected and nobody runs the risk of losing seriously. There are obviously still risks but this way the original lender can't call a "due on sale" clause. And the new buyer has a legitimate stake in the purchase (if he/she can qualify through a lender). You can still put money down or structure the purchase how you see fit.
Thanks Eric. It is indeed a good way to avoid risks on account of the due and sale clause. Instead of having a second lien, it is better to go by this method. Thre best thing is, it offer protection to all parties involved in the transaction.
I should add that local laws will have something to do with the determined agreements as well. Rent to buy as I have shown is not legal everywhere, just like lease options and land contracts. Different local laws can have an effect on what financial tools you use. Just wanted to throw that in, but not wanting to complicate the matter. Oops, Looks like I just did. So with that said it is always a good idea to consult with a reputable local attorney.
I am buying some acreage from the seller and he is financing. Can he ask for payments to begin before we get the land surveyed and have the closing? We signed the purchase contract in November and we were supposed to have the closing in mid December but we could not because the surveyor could not get to us until this February. Now the seller says we forfeited because we did not make a payment in January and another payment is due at the end of this week. The purchase agreement says that interest will accrue starting December 15 and payment begins January 15 and on the 15th of each month after that. Are we supposed to have made payments in Jan. and Feb. even though we have not had a closing?
Hi Guest,
Welcome to our community forums.
I think everything should go by the contract. If your contract says payment should begin in January, it should start then only. But does your contract say anything about an upfront payment? may be the seller is asking for an upfront payment in the form of down payment.
However, if the closing is not yet done, then the monthly payments should not start. The seller should have amended the contract then. He can at least ask for the down payment but not the monthly payments. I think you should have a straight talk with him and if he's not willing to listen simply stay out of this contract, if possible or else seek legal advice from an attorney.
Regards,
Jessica.
Welcome to our community forums.
I think everything should go by the contract. If your contract says payment should begin in January, it should start then only. But does your contract say anything about an upfront payment? may be the seller is asking for an upfront payment in the form of down payment.
However, if the closing is not yet done, then the monthly payments should not start. The seller should have amended the contract then. He can at least ask for the down payment but not the monthly payments. I think you should have a straight talk with him and if he's not willing to listen simply stay out of this contract, if possible or else seek legal advice from an attorney.
Regards,
Jessica.
I HAVE A QUESTION. IM NEW TO SELER FINANCING AND I HAVE SOMEONE WHO'S INTERESTED IN DOING SELLER FINANCING WITH ME B/C IM NEW TO THE COUNTRY AND DONT HAVE ALOT OF CREDIT. I KNOW THAT THE SELLER OWES MORE ON THE HOUSE THAN WHAT THEY WANT TO SELL IT TO ME FOR. IT SOUNDS LIKE A GREAT DEAL. BUT IM WORRIED AND WONDERING HOW CAN I BE COVERED TO MAKE SURE I OWN THE HOME WITH A CLEAR TITLE OR SOME KIND OF INSURANCE? SO I KNOW NO ONE CAN TAKE THE HOME FROM ME?
Hi,
i've already replied you at http://www.mortgagefit.com/shortsale/owner-financing.html . Please have a look at it.
i've already replied you at http://www.mortgagefit.com/shortsale/owner-financing.html . Please have a look at it.
Who would you go to that would handle paperwork to make an owner finance deal legal and on paper?
Welcome madamx,
I feel you should contact an attorney. He will handle the paperworks to make the deal legal.
I feel you should contact an attorney. He will handle the paperworks to make the deal legal.
he said he would owner finance for the 20 years he has left on the house what happen after he pay it off do the deed go in my name
Hi Guest.
Are you the owner of the property? If so are you ready for the owner financing? Now the buyer will get the property on his name after paying off the loan but if he cannot pay the loan off then you can even foreclose.
BTW is the buyer want to assume the loan? You need shed a bit more light on this so that we can help you better.
Best of luck,
Larry
Are you the owner of the property? If so are you ready for the owner financing? Now the buyer will get the property on his name after paying off the loan but if he cannot pay the loan off then you can even foreclose.
BTW is the buyer want to assume the loan? You need shed a bit more light on this so that we can help you better.
Best of luck,
Larry
A note broker presented a contract to my seller. He is a bad scenario? The owner/seller has a first mortgage on the property for $110,000. We create a promissory note for the sale price of $131,000.00 with a 360/month 7.5% interest rage. The promissory note is never registered or recorded but the tenants/borrowers have occupied the property on a lease/purchase contract for 24 months. The seller gives back 3% for down payment. The unrecorded promissory note and seller financing contract were negotiated with a note buyer and he offers $80,000 for the promissory note. Who pays off the first lien or is it really going to be paid off by the new buyers. Does the tenant/borrower on the promissory note have to be present for the transaction. Does the seller/owner financing have to notify the lender that he sold a promissory note? Any comments.
Thanks
Donna
Thanks
Donna
Donna if you are one of the principals in that scenario seek out a RE atty what it sounds like is the seller is trying to double the money and is creating a fraudulent note. If you are the buyer I would be leery as it sounds like you could end up owing on 2 notes. I am not sure as I have read multiple times and still am not clear on what is taking place... a few hundred now or thousands later?
Get an Atty.
Brian
Get an Atty.
Brian
