How Does Buying A Home With Owner Financing Work?
Have you been trying to buy a house through traditional means lately
?
Using a Realtor and mortgage broker to purchase a dream house with a white picket fence isn't as easy as it used to be.
How about selling you home? Finding a buyer who can qualify for a loan is extremely difficult as well.
Who is the culprit most responsible for buyers not being able to purchase property and sellers not being able to transact? The bank! So if you could eliminate the bank from this process, do you think you would be able to make a real estate transaction?
A popular and easy to execute strategy that offers a solution to both scenarios is known as Seller Financing. Seller financing is when the owner takes a second note, or even finances the entire purchase of the property in order to assist the seller in financing a real estate transaction.
Usually sellers will offer this option when a buyer has difficulty qualifying for a conventional loan or meeting the 20-30% required bank down payment.
Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller's favor.
These special circumstances must be acceptable to the lender who makes the first mortgage on the property. The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and seller.
Seller financing is advantageous to the buyer for three main reasons. First, seller financing typically has less closing costs than conventional financing. Conventional financing has closing fees up to 9% of the deal. With seller financing, the fees are generally less than conventional fees and usually between than 5-7% of the deal.
Second, in addition to the closing fees being reduced, the down payment required is generally less. For banks, a 20-30% down payment is required. For seller financing, that amount is negotiated, but generally is around 10-20%. Generally speaking, the higher down payment you invest in your property, the less risk in the eyes of the owner financing the property and the better monthly payment plan you may negotiate.
Finally, you have more flexibility on the terms. The parties can negotiate the interest rate and the repayment schedule, as well as other conditions of the loan. The buyer can request special conditions of the purchase, such as the inclusion of household appliances. Also, the borrower does not have to qualify with a loan underwriter. And, unless negotiated, there are no PMI insurance premiums.
The following would be an example of a typical owner finance terms:
5% owner finance fee
Initial down payment of at least 10% of the sale price
Fully amortized term between 24 and 120 months
Interest rate of 8 to 20%.
The interest rates are higher than conventional loans in order for the owner to counterbalance the risks - limited equity, a payer with low or no credit score, possible foreclosure, or having to foot the bill for legal actions and selling the property via auction. But with the elimination of PMI Insurance, the monthly costs end up about the same. As the buyer, you will need to make the determination as to whether or not a higher monthly payment for 1-3 years is worth the ability to own your dream home.
The benefits of seller financing the property for the seller are as follows:
1) You receive payment 3 different times. As the seller, you receive money when you sell the property (in the form of the owner finance fee), when you receive monthly payments (difference between what you receive and what you owe), and when you the mortgage balloons at the end of your term (negotiable, but generally balloons within 2-5 years).
2) You are the BANK, not the landlord. All you do is collect checks. You are no longer responsible for repairs. Do people call Chase Bank when their toilet clogs? No. And your buyer will not call you for repairs. Again, they're the homeowner and responsible for all maintenance and repairs. All you do now is collect money!
3) Flexibility. You can determine whether or not a buyer qualifies instead of leaving it up to banks. If their credit score, job history, and reserve requirements are to your liking, then you make the decision as to whether or not to execute the deal.
In summary, seller financing is an advantageous strategy for both buyers and seller as under current economic and banking conditions, many buyers do not qualify for conventional loans and transactions are not being made. This strategy is also attractive because the fees are lower and the requirements are more flexible and negotiable. Anytime you can take banks or underwriters out of the equation, you can guarantee a much more personal and expedient outcome.
by: Curt Maly