A home is typically the largest single investment a person ever makes. Because of the hefty price tag, there’s usually some type of financing involved, such as a mortgage. One alternative is owner financing, which happens when a buyer finances the purchase directly through the seller, instead of going through a conventional mortgage lender or bank.
With owner financing (aka seller financing), the seller doesn’t hand over any money to the buyer as a mortgage lender would. Instead, the seller extends enough credit to the buyer to cover the purchase price of the home, less any down payment. Then, the buyer makes regular payments until the amount is paid in full.
Important: Even the most sophisticated sellers are unlikely to subject borrowers to the stringent loan approval procedures that traditional lenders use. Still, this doesn’t mean they won’t run a credit check. Potential buyers can be turned down if they are a credit risk.
Most owner-financing deals are short term. A typical arrangement is to amortize the loan over 30 years (which keeps the monthly payments low), with a final balloon payment due after only five or ten years. The idea is that after five or ten years, the buyer will have enough equity in the home or enough time to improve their financial situation to qualify for a mortgage.
Owner financing can be a good option for both buyers and sellers, but there are risks. Here’s a look at the pros and cons of owner financing, whether you’re a buyer or a seller.
Tip: It’s a good idea to consult with a qualified real estate attorney who can answer any owner-financing questions and write the sales contract and promissory note.
For buyers, owner financing has a number of advantages and disadvantages that should be considered before entering this type of arrangement:
Of course, there are pros and cons for the sellers in owner-financing deals, as well:
Important: The Dodd-Frank Act owner-financing restrictions don’t apply to rentals, vacant land, commercial properties, and non-consumer buyers, including limited liability companies, corporations, trusts, and limited partnerships.
If you can’t qualify for a mortgage, you might be wondering where you can find owner-financed homes. Here are some options:
While it’s not common, seller financing can be a good option for buyers and sellers under the right circumstances. Still, there are risks for both parties that should be weighed before signing any contracts.
If you’re considering owner financing, it’s generally in your best interest to work with a real estate attorney who can represent you during negotiations and review the contract to make sure your rights are protected.
Source: Investopedia Click here for article