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 was making payments monthly on 5 acres of land. then one day the property was for sale and the owner hadnt told me anything, we have a contract signed but it is only notarized. what can i do?
So is there anything i could do to get my money back? i had been paying it for 1 year and now i stopped since february because i cant get him to answer my phone calls
As the deed was not notarized, I don't think it would be considered as a valid deed and thus, you would have difficulty in recovering your money. You may negotiate with the property owner and try to recover your money from him.
We are under an owner financed contract and one of the sellers in the contract is filing for bankruptcy. What happens to our contract in the bankruptcy court?
i don't know bankruptcy law, am not a lawyer, but i have an opinion on that. my opinion (please consult with a real attorney) is that the contract ought to be honored despite their filing of bankruptcy. that is, of course, assuming that the contract is valid. and that's simply one of the reasons i insist that you get legal help here. you need protection and you need to be sure you're not going into this thing blind.
My husband & I are interested in purchasing a successful, local business. We have great credit, but would rather not deal with a bank, if possible. How do I get more info on owner financing a business (not a home) & make it appealing to the current owner/seller?
frankly, i'd be surprised to learn that a business owner would be willing to sell and take back the financing, unless this was an independent type of person who also owned other entities.
i think the most frequent type of sales of businesses are likely to be those who are seeking to leave their business behind in favor of retirement or to seek yet a new career elsewhere.
as for where to look for tips...i'm sure some of the entrepeneurial types of magazines' sites would be a good place to pick up some pointers, along with the wide variety of business magazines and sites. i don't have experience in the field, so this is simply speculation, mind you.
i think the most frequent type of sales of businesses are likely to be those who are seeking to leave their business behind in favor of retirement or to seek yet a new career elsewhere.
as for where to look for tips...i'm sure some of the entrepeneurial types of magazines' sites would be a good place to pick up some pointers, along with the wide variety of business magazines and sites. i don't have experience in the field, so this is simply speculation, mind you.
What type of items do an owner look at to determine to owner finance with a potential buyer. We are looking at a house right now and another couple is looking at it also. What is the deciding factor? We do not have the greatest credit but we do not have many expenses and we make a really good combined monthly income. We also don't owe much just our cars. His current home is paid off, but the other competeing couple still owes on their current home and have to sell it also.
i suspect what you're trying to do is to come up with the rationale for the seller choosing you over the other prospective buyer. if i'm an owner considering financing the sale of my home, i will absolutely insist on seeing your credit report (theirs, too). i would also want to know all about your job histories, just as an institutional lender would. you'd be giving me pay stubs, w2s and maybe even tax returns. you'd be giving me bank statements, because i'd want to know that you aren't check bouncers. after all, if i'm receiving your payments by check, i sure don't want them to bounce.
it's pretty much impossible to get inside the head of a person contemplating lending in that situation (owner-financing). in my opinion, it's a very risky way in which to sell a home, and i doubt i'd entertain the thought unless i could get a sweet interest rate in the bargain.
i don't know if i've been all that much help, but one other thing sticks in my mind as well. if you write a quite specific and convincing letter explaining your plans for how you intend to pay back the loan, and even elaborate on how you feel about the house itself, you might have a winning entry.
it's pretty much impossible to get inside the head of a person contemplating lending in that situation (owner-financing). in my opinion, it's a very risky way in which to sell a home, and i doubt i'd entertain the thought unless i could get a sweet interest rate in the bargain.
i don't know if i've been all that much help, but one other thing sticks in my mind as well. if you write a quite specific and convincing letter explaining your plans for how you intend to pay back the loan, and even elaborate on how you feel about the house itself, you might have a winning entry.
Jessica,
I have a few people that I have been doing contract for deed with, Is there a loan program where I can get them refinanced and pay me off if they have a low credit score but they have paid me on time ??
I have a few people that I have been doing contract for deed with, Is there a loan program where I can get them refinanced and pay me off if they have a low credit score but they have paid me on time ??
i think i would be careful to label myself as "Ebenezer" if i were lending to private individuals, given the thoughts that Dickens-inspired name bring up to most people.
"a low credit score" is so undefining as to be meaningless. what kind of scores are you speaking of - sub-600? sub-500? how quickly one can refinance will rest, in part, on where the credit score starting point is.
"a low credit score" is so undefining as to be meaningless. what kind of scores are you speaking of - sub-600? sub-500? how quickly one can refinance will rest, in part, on where the credit score starting point is.
2 years ago i bought a house in texas..my credit was bad..i paid $108,000
but put down $30,000..........the seller gave me their business card they worked for a real estate company....now i found out they were fired because of doing these type of seller financing loans....anway my problem is ..........i pay my monthly payment allways at time....after trying for two years i finally got a copy of their bank statement......they owe $3,000 to bank more than i owe to them. they have not paid yearly association fees which i pay to them monthly and the big one is they have a 30 year loan with the bank and i have a 20 year loan with them.....should i get an attorney for fraud and misrepresentation......also isnt the real estate company responsible for the actions of their agents?????? please help me i am on disability..........agent orange from vietnam.........have limited funds
thanks....re phil
but put down $30,000..........the seller gave me their business card they worked for a real estate company....now i found out they were fired because of doing these type of seller financing loans....anway my problem is ..........i pay my monthly payment allways at time....after trying for two years i finally got a copy of their bank statement......they owe $3,000 to bank more than i owe to them. they have not paid yearly association fees which i pay to them monthly and the big one is they have a 30 year loan with the bank and i have a 20 year loan with them.....should i get an attorney for fraud and misrepresentation......also isnt the real estate company responsible for the actions of their agents?????? please help me i am on disability..........agent orange from vietnam.........have limited funds
thanks....re phil
yes phil you need a lawyer...right away. you've been duped and the only way you'll be made whole is by finding out - from a lawyer - what recourse you have to fix the problem. go get yourself a good lawyer right quick!
I am a real estate broker and am concerned about my liability pursuing seller financing for clients. A lot of sellers open to seller financing (or "carrying the contract") have 1st mortgage liens and I know that even if they don't have a due on sale clause, the deed states they cannot transfer (i.e. sell) the property without permission from their lender. Obviously a lender won't approve of the title being transferred, so a lot of sellers are offering to just take the down payment money, take the monthly payments on the contract and just not tell their lender they transferred the title and/or recorded a lien on the property. Of course there are ways to make sure the mortgage actually gets paid (the buyer making the payment directly to the lender) but my concern is collecting a commission putting this kind of deal together knowing they are avoiding some big issues, because out of the 3 parties involved, I am the one with the license.