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?
I am able to pay between 500-800 a month.
how do i know if anyone near my town is financing their home?
im looking to buy a house with the owner financing. im not exactly sure how this works but from what he told me is, the purchase price of the home is 60,000. i will leave a deposit of 5,000 and my monthly rate will be 750. i have the option to do a one year or two year and then i would refinance the home in my own name. is this correct? how would the deed read before i refinance, would the owner still be on it until i refinance? or is the home all mine? my other question is will i still be able to recieve the tax credit for first time home owners?
we have been doing a owner finance on a house for the past 7 months.. we pay the owner our payment on time everytime... come to find out he hasnt been making the payments to the bank... now the house is in foreclosure... he's trying to get it out question is... he broke the contract... do we have to continue to pay him since it's in foreclosure and he hasnt been paying the bank?
Hi renee,
I think what the seller is talking about is actually a rent-to-own type of Owner financing agreement with you. Under this type of agreement, you make a certain amount of deposit, as you do in a renting agreement, and pay a monthly rent to the seller. The agreement specifies a certain time period within which the buyer has to refinance the loan. Once the terms of the agreement are fulfilled, the seller signs over the free and clear title to the buyer. Your name will not appear on the deed until you refinance the loan. Thus, you will not be able to qualify for the tax credit till the time you get the clear title to the property.
Hi tdditto,
There is no reason why you should be making the payments to the owner. He has breached the contract and the house is in foreclosure. He should consult with an attorney and sue him for having violated the terms of the agreement. Do you have good credit and a decent income? If you have and can afford the mortgage payments, you can talk with the bank and purchase the house in your name. If you can make the purchase before Dec. 1, you can take advantage of the $8k tax credit.
I think what the seller is talking about is actually a rent-to-own type of Owner financing agreement with you. Under this type of agreement, you make a certain amount of deposit, as you do in a renting agreement, and pay a monthly rent to the seller. The agreement specifies a certain time period within which the buyer has to refinance the loan. Once the terms of the agreement are fulfilled, the seller signs over the free and clear title to the buyer. Your name will not appear on the deed until you refinance the loan. Thus, you will not be able to qualify for the tax credit till the time you get the clear title to the property.
Hi tdditto,
There is no reason why you should be making the payments to the owner. He has breached the contract and the house is in foreclosure. He should consult with an attorney and sue him for having violated the terms of the agreement. Do you have good credit and a decent income? If you have and can afford the mortgage payments, you can talk with the bank and purchase the house in your name. If you can make the purchase before Dec. 1, you can take advantage of the $8k tax credit.
We bought a house which is financed through a bank and we pay the man we bought it from and he pays the bank. The bank is ok with this and we own the house until we buy it. Who is paying the insurance on the house should we? Do we go find private insurance?
you'd better find out if the current owner has a current policy. if not, you're all in jeopardy.
how can it be that "we own the house until we buy it"??? frankly, i don't see any sense in that statement.
how can it be that "we own the house until we buy it"??? frankly, i don't see any sense in that statement.
I am purchasing a home with seller financing. I will make the monthly payment directly to the seller's bank account. Will this payment show up on my credit history and can this increase my FICO score? HOW will this affect my credit?
it won't have the least bit of impact on your credit history, kristen. for all anyone knows, you are simply depositing money in the guy's bank account. be certain that you have an amortization schedule and that you will be provided some sort of receipt for all monies paid to you. i think you're on one of those slippery slopes we continue to read about if you're just going to be making deposits. you'd better do it by check, and you'd better be certain that you have copies of those checks, and evidence that they've been cashed.
you seem to be lacking protection here.
you seem to be lacking protection here.
can the buyer use the home to borrow money before it is paid for
i'd have to say "no" to that last question.
We do not have good credit, but have found some people who would consider doing owner financing. They are saying that at this time they have a 3 arm. They are talking about maybe 2 yr of owner finance and then we get our own financing. We dont want to put alot of money and time into fixing up a house and down money if we wont qualify after 2 yrs. Is the rent to buy something that could still be an option for us and them. ?? They are open to options as are we. This is in Arkansas.
luvbugz if there's any chance you think that your opportunity to qualify in two years is in jeopardy, then i would suggest you think extra-hard about this owner financing scenario.
nobody can predict what the market will be like in 2 years; nobody can predict how your financial situation will be in 2 years; all you can really do is to make a plan to do what you need to do to get qualified and work at it as best you can. if it works, wonderful; if not, well you tried. that's about as good an answer as i can provide at this point. however, be encouraged and work to resolve the credit issues of the past so you can move forward when the time comes.
nobody can predict what the market will be like in 2 years; nobody can predict how your financial situation will be in 2 years; all you can really do is to make a plan to do what you need to do to get qualified and work at it as best you can. if it works, wonderful; if not, well you tried. that's about as good an answer as i can provide at this point. however, be encouraged and work to resolve the credit issues of the past so you can move forward when the time comes.
I would like to buy a house with no money down and no closing costs from a fsbo assuming I found one can the seller and buyer agree on a price paid as a home loan with interest possibly with any closing costs coming out of earnest money and taxes being paid by buyer and of course closing being handled by a title agent would seller have deed and right to rent property and in agreed upon timeframe to remortgage with a bank or lender or to sell property and payoff original seller holdig the note?
i don't see how you can get a no-closing-cost owner financed deal. you expect the seller to pay your legal costs, your appraisal fee (if you get one), your recording fees, etc? that's pretty far-fetched.