Buying a home is one of the most significant investments a person can make in their life. Since buying a house comes at such a high monetary cost. Most people need to seek out some financing to help pay for their new home.
When buying a home, try to find the best financing option for you and your family.
The most common type is the residential mortgage loan. A residential mortgage is a personal, family, or household loan. Secured by a deed of trust or any other equally binding contract on a residential property.
Many times, the loan is secured by a bank or a mortgage lender company.
Most people know about residential mortgage loans because they are the most popular and the most widely available. Some people think that they can only get a loan through a bank or a lender company. Knowing there are other options out there.
One such option is called owner financing. Owner financing is an excellent choice for a buyer, and a seller to not only speed up. The process but have more control over the home purchase.
What Exactly is Owner Financing?
Owner financing involves purchasing the home directly from seller instead of using a loan from a lender or bank. In this process, there is no intermediary between the owner and the buyer.
Owner financing, also known as seller financing. Consists of owner extending enough credit to the buyer to cover the purchase of home, minus any down payment.
The owner does not give the buyer any money in the form of a loan. Mortgage lender or bank would, but instead sets up regular payments with the buyer.
The buyer then will pay on a fixed payment schedule until the home is entirely paid off.
How Does Owner Financing Work?
To set up the financing for the home. The seller and buyer create a promissory note which outlines in detail. The terms of the loan which includes the interest rate, repayment schedule, and the consequences of either party. If they do not keep up with the signed agreement.
If you are unfamiliar with a promissory note. Promissory note is basically just a written promise between two parties. When signing the record, both parties agree to what is written.
For example, if buyer promises to pay monthly payments to the seller. Then the buyer is legally obligated to do so. If they do not follow through the house can be taken back by the buyer.
The same goes for the seller. If the seller promises to provide a fixed percentage. Then they are legally obligated to keep that interest rate. If they change the percentage rate, the buyer can seek punitive damages in a court of law.
Most parties will contact an experienced real estate lawyer when writing up a promissory note. If neither party (buyer or seller) has any knowledge of real estate law. It is in the best interest of both to hire a legal professional.
When writing a promissory note (be it the parties involved or a lawyer). It is essential to outline the complete deal in the agreement. So each party is aware of what is involved in this financial relationship.
Shy away from vague statements and make sure the details are concrete and definite. Doing so will be helpful with any future interactions between the parties.
Both parties need to be fully aware of their responsibilities to keep this deal. If they are not, the contract can quickly fall apart leaving both parties frustrated.
How Long Does Owner Financing Deals Last?
Usually, owner financing deals are short-term and involve the buyer slowly paying down the loan. Over 30 years with one last balloon payment due after five.
The 5-year theory is belief that after five years the buyer should have enough equity and enough time. To improve his/her financial situation to be eligible for a traditional mortgage loan.
Why Should You Use Owner Financing?
An owner financing deal is a good option if you do not want to deal with a lender company or a bank. Sometimes working with a larger company can be a hassle because they have other clients to handle. So they may not have enough time to answer any of your questions.
With an owner financing deal. The seller is usually very easy to get in touch with and able to answer any of your concerns.
Advantages and Disadvantages of Owner Financing
If you are in the process of looking for a new home, here are some of the pros and cons of Owner Financing.
Advantages for The Buyer
Owner financing helps not only the seller but the buyer as well. One advantage for buyers is the faster and cheaper closing of the purchase. The process is more rapid because the buyer does not have to wait for a bank loan officer or an underwriter to process and then approve the loan application before anything happens.
The closing costs are cheaper as well because the buyer does not have to pay any banks fees or appraisal costs. The buyer does not have to worry about any extra hidden costs with an owner finance deal.
An owner financing deal is also great for a buyer who does not qualify for a traditional mortgage loan. Owner financing allows those who may have had some bad luck with their credit in their younger years have the opportunity to buy a home.
Advantages for The Seller
Now that we’ve looked at the pros for buyers let’s take a look at some of the many advantages for the seller.
One pro for sellers is the seller’s ability to sell the property “as is.” Selling the property as is allows the seller not to have to worry about making costly repairs to the home which lenders usually require.
Another positive is that making an owner financing agreement offers the potential to earn higher rates on money used for selling your home. Or if you sell the promissory note to an investor (who will take over the contract). You will get a lump-sum payment right away.
Disadvantages for The Buyer
Now, even though an owner financing deal is helpful in many ways. There are a few legal and financial hiccups that can affect the overall situation.
With an owner financing deal, interest rates will probably be higher than the loans offered by banks and mortgage lender companies. The higher interest rates make sense because the seller is taking a risk providing the extended credit to the buyer.
If you enter into an owner financing deal, you need to make sure the seller owns the house and does not own any money on a mortgage. In most mortgage contracts there is a “Due on Sale” clause which means once you buy the house from the seller, you are now financially responsible for paying the debt of the house in full.
If you do not pay back the debt, the bank can foreclose the property. Make sure you verify with the seller that they own the house before you enter into any financial agreement.
Disadvantages for The Seller
The major con that sellers may have to face is the buyer stopping payments. The payments go into default and now you no longer have any money coming in for the house.
Some buyers may even remain in the home which means the seller has to go through the foreclosure process. If this occurs, the seller will need to hire a lawyer and get the local police department involved in the matter.
Having to deal with a buyer who does not can be a hassle for not only the seller’s state of mind but his/her wallet as well.
Another con is that if the seller takes back the property they are not responsible for any maintenance or repairs. Maintenance could be somewhat costly especially if the buyer did not take care of the property.
Is Owner Financing Best for You?
Whether you are a buyer or a seller, owner financing can be a great alternative to residential mortgage loans. If you are looking for the opportunity to deal with someone other than a bank or a lender company, this option affords you that opportunity.
Before jumping into owner financing, whether buyer or seller, make sure you thoroughly understand every aspect of the deal before signing anything. Unlike using a residential mortgage loan, you are the one responsible for how the deal goes down.
If you are uncertain or have any doubts whatsoever, take a moment to think things through. Weigh the pros and cons of the situation until you find the right solution for you and your family.
Owner financing speeds up the home buying process, not only for the buyer but the seller as well. If you decide to go with owner financing, make sure you know all of the advantages and disadvantages for both parties involved.