You’ve dreamed of owning your home for years and you’re finally ready to take the plunge and start looking. After searching through countless websites, you finally find your perfect dream home and it’s available through owner financing.
Owner financing is different than a traditional mortgage in that you don’t get a loan through the bank, but instead, work with the current owner of the home and pay them directly.
You create a contract and agree to pay a down payment, monthly payments, etc. and when the contract is done, the deed is transferred to your name.
There are many pros and cons associated with this type of financing versus the more common seller financing through a lender.
What is Owner Financing
Owner financing is a type of financing that is disclosed while advertising property when owner financing can be considered as an option. This financing type is common in cases when the buyer cannot finance the purchase of the property and does not even get a sufficient loan from a bank.
Owner financing is a feasible option in friendly relations or when family members get in real estate contract. Here are a few situations when owner financing may be an option:
- The buyer does not have sufficient funds for a down payment to reduce the debt amount thereby protecting against the fluctuating property values.
- Poor credit score of the buyer deems them a high-risk borrower which makes them ineligible for a traditional mortgage.
- Property has a high selling price, which makes it difficult for the buyer to obtain traditional financing.
- Both sides of the deal want to close it soon, due to the substantial underwiring, documentation and appraisal procedure. This makes waiting for the loan to come through a long wait.
- The seller requires a passive income stream, and this transforms a seller into a lender. If you are a lender, you’ll be owed money which opens a stream of income for you.
There are several other situations where a seller may turn into a lender and engage in owner financing. This may include tax benefits for the buyer and sellers, where the interest deductions may become available for buyers. This reduces the taxable income through tax deduction.
Sometimes, even the uniqueness of the property may lead to the seller acting as the lender. This may occur when the property cannot be financed by conventional lenders due to the risks they think are associated with the property.
Why People Prefer Owner Financing?
There are several reasons depending on the situation as to why a buyer would choose owner financing. But the following are a couple that may be the reasons behind it:
Owner Financing is Simpler
When you want to get a home loan, there are many hoops to jump through. You go from bank to bank comparing mortgage rates, loan terms, and more.
The bank wants to pay stubs, tax returns, and other information before they even think about giving you a mortgage loan.
With the owner financing via houses for sale by owner, you deal directly with the owner. There aren’t any banks or hoops to jump through.
Everything is hammered out between the two parties. When it’s finished, they create a legally binding contract. There’s no Realtor or lawyers to deal with unless you want them there.
A Better Choice for Troubled Credit
The biggest determining factor in getting a mortgage is your credit report and credit score. If you have a history of defaulting on loans or being late on bills, then it. If it gets too low, then you’re stuck with high-interest rates, or you can’t get a loan at all.
The mortgage process is stacked up against those with bad credit because banks consider you too much of a risk. Owner financing eliminates that obstacle. The owner can still offer you a mortgage contract regardless of your credit score (does matter of building credit score).
They may want to see it, but it isn’t a guarantee of denial. You must convince the owner that you’ll make the payments on time.
Property Closing and Other Costs Lower for a home is thousands of dollars because of the many people involved. There is the bank, the Realtor, a lawyer, and more who draft up the mortgage papers, so you can own a home.
Owner financing lowers these costs because there aren’t as many people involved. Realtors want their cut and lawyers are expensive. You cut out the middleman, but you also open yourself up to trickery.
While you don’t need a lawyer for the entire process, you should have one look at the final agreement before signing it.
These contracts may contain a balloon payment that needs to be paid at the end of the loan. If you’re not prepared, then you could end up losing the house after paying for it for years.
Cons Of Owner Financing
Despite there being a lot of relief for the buyer, there are a few downsides to owner financing and those are as below:
- For buyers, owner financing may involve a clause of balloon payment wherein they are forced to have a significant amount of funds at one time.
- It also poses a significant disadvantage for the buyer as they may have to pay the lender at higher interest rates.
- It has legal protection that may invite legal action against the buyer if there’s any delay or other anomalies.
- For sellers, this may be risky as they may face delayed payments which puts them at risk of not being able to secure the entire amount of the purchase.
- In case the buyer defaults on the loan, the seller is liable for going through foreclosure to regain their property.
- The extended period of clearing payment forces the seller to receive the amount gradually instead of at once. This may hinder their cash flow.
Weigh Your Options
Owner financing is the only type of financing available. Take your time and decide which is best for you. You may want the security that a bank loan provides at the lower cost of an owner-financed contract.
If you want to learn more about mortgages, then please explore our site.
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