If you’ve ever perused house listings, you may have come across a few that say, ‘owner financing available.’ It may sound weird that someone trying to sell their house would lend you the money to buy it, but there are some advantages for sellers as well as buyers.
Keep reading to learn all about this unique form of financing.
What is Owner Financing?
First, let’s look at the definition of owner financing. In short, it’s when the seller gives you the money to buy the home. In other words, the seller provides you with the loan to buy the home. They can provide you with a part of the funds or supplement a loan you can get from a bank. All of this is after the required down payment, which will depend on your method of financing.
Just like you would with any other loan, you and the seller must agree to the terms. This includes the interest rate, term, and costs. Don’t forget about the fine print items, like the consequences of missing a payment or defaulting on the loan altogether. The mortgage documents are recorded with the county as they would with a bank loan. You then proceed as you would with any other loan, making regular payments.
What’s the Required Down Payment?
Many people want to know, just how much do you have to put down on the home? This will vary by lender, just as it does with banks and various mortgage programs. A majority of sellers want a large down payment just to protect their interest in the transaction. The more money you have invested in the home, the more likely it is that you’ll make your payments on time. At least that is how lenders think.
What’s the Interest Rate?
This is where things may get tricky. You will likely pay a higher interest rate on owner financing than a loan from a bank. Owners have more to lose than a bank. If you stop making payments, the owner can go into financial ruin. A bank, on the other hand, would be able to pick up the pieces. That doesn’t mean they like the loss, but they can usually recover.
In order to make up for this risk, sellers often charge higher interest rates. Because buyers looking for this type of financing are usually unable to find financing elsewhere, it makes sense that you would pay more. It’s usually a choice between paying the higher rate or not buying the home.
How do you Qualify?
There is no cut and dry answer to qualifying for owner financing. It depends on the owner. If we are talking in general terms, sellers usually want high down payments, good credit, and stable income. It’s not much different from what a bank would want, but sellers can work around strict requirements that lenders require.
Here’s an example. Let’s say you have a 700 credit score and a 28/36 debt ratio. These are right in line with what Fannie Mae financing requires. You seem like shoe-in for this type of financing; however, you just started your own business 3 months ago. Most banks won’t touch your loan. Three months is not long enough for a lender to determine if your income is stable and if you will succeed in the business. Technically, they want 2 years of experience, but even 1 year will suffice in many cases.
An owner, however, may see the possibility of making money on the interest of the money they lend you. They will ask for your credit report and want to know your income, but they may not see your new company as risky as a bank does. Because they can make their own rules, it’s up to them.
This isn’t to say any or all owners would allow self-employment for just three months, but it’s an example of how flexible owners can be.
Balloon Payments are Common
One word of caution if you do choose owner financing, though, is the chance of a balloon payment. Owners have to be upfront with you regarding the terms of the loan. They may give you a 5-year balloon. This means you make fixed payments for 5 years. The 60th payment; however, is the remaining outstanding balance, which as you can guess, can be a large amount of money.
Owners usually offer owner financing for the short-term. They see a potential buyer that is restricted by the bank’s rules right now. They offer the short-term solution by bridging their financing needs for the short-term. Once the term is up, it’s the hope that you can refinance into a bank loan, paying the seller off and taking the title of the home.
You can get owner financing for all or part of the purchase price of the home. It depends on the owner and the risks they want to take. If you see an ad with the opportunity to secure financing from a seller, make sure you get all of the details. While there are some laws governing seller financing, they aren’t as strict as the laws regarding bank financing. Having a good lawyer will help you understand what you are getting yourself into before making any decisions.Click to See the Latest Mortgage Rates»