How to Owner Finance

Title:  How to Owner Finance

You have been trying to sell your house for quite a while.  Back when you originally put it on the market, obtaining credit was easy for most qualified buyers.  On a couple of occasions you had a deal in place with a buyer but it all fell through because of the buyer’s less-than-sterling credit rating.  To make matters worse, the credit market has tightened up since the beginning of 2016.  

Now you’re stuck with a house that you can’t sell, because all but the most qualified buyers can’t get a home loan.  Granted, your finances were stable enough that you weren’t obligated to sell in order to move to your new home.  However you would like to recoup at least some of your investment.  Walking away from the property has crossed your mind, but that is a last-ditch solution.  You feel as if you don’t have any options left.  There is one more option, an option that is becoming more and more plausible for homeowners like yourself.  Have you heard about “Owner Financing?”  Here’s an explanation about how this method of home selling can help sell your house.

Simply put, owner financing is a scenario where the owner of a house bypasses the traditional home loan process and finances the buyer’s purchase on their own.  The owner/lender has the option of financing the full amount of the purchase, or if the buyer has procured a loan for part of the selling price, can finance the difference.

Before the deal is reached and the agreement is signed, the owner/lender must become the lending institution (to an extent) and work with the buyer to create a satisfactory agreement for both parties.

The buyer will also have the same duties as if they were purchasing through a conventional lender.  They should compare the seller’s price to properties and locations that are comparable to their intended purchase.  Most importantly, the potential buyer must check to insure the property is legally owned by the seller.  In addition, they should make sure there are no outstanding mortgage payments or liens against the property.

Unlike a traditional home loan, the length of an owner financed loan can vary depending upon the situation and what the goals are of each party involved.  The loan either ends with the buyer procuring a longer-term loan for the remaining amount, or with a balloon payment that pays off the loan in full. The former option is dependent on a softening of the mortgage loan market (if the original sale is made during a tight market), and can sometimes backfire on the seller. A major benefit for the Seller carrying for a longer period of time is that there may be tax benefits and long term financial security that is created by remaining as a lien holder on a property. For example, if the terms of the agreement are not met the Seller can take back position of the property and do it all over again and enjoyed the financial benefits all along the way. How’s that for a benefit compared to the “perceived security” of the stock market? This can create a type of annuity or residual for a Seller. This is far more beneficial to many sellers than “renting” their house out. With an owner financed solution the seller can enjoy the benefits of the monthly income without having all the hassle of paying for ongoing maintenance, insurance, taxes and all the other headaches that a landlord would have by just renting.

Because owner financing is a non-conventional method of mortgage financing, there are risks and benefits not associated with conventional mortgage loans.

In an owner financed situation the buyer faces the greatest amount of risks.  Here are some examples of what a buyer will face that is similar to borrowing from a bank versus renting:

  • Buyers will be responsible for all maintenance of the property. There is no landlord to call for repairs. If it breaks…you fix it.
  • Buyers will also pay for all insurance and taxes.
  • Buyers may have to pass a credit check to obtain the owner’s loan.
  • The seller has the option to sell off the promissory note, just as a conventional lender might.

In spite of the risks, there are numerous benefits to both parties with an owner financed home sale.  As listed by realtor.com, in a March, 2015 article, here are the benefits available to both parties:

Seller’s benefits:

  • Noting “owner financing” in the listing can increase interest from potential buyers.
  • During a soft market the owner can offer owner financing as a way to entice a potential buyer, or close a deal.
  • Owner financing can be an interest earning investment.
  • An owner can list a higher price for the house because they are the financier.
  • The house may be sold without the owner having to make repairs (by agreement).

Buyer’s benefits:

  • If a poor credit history limits available credit, owner financing may enable the buyer to afford a more expensive house.
  • The seller may finance the entire amount if the buyer cannot qualify for a conventional mortgage.
  • A lower interest rate can be worked out.
  • There may not be a requirement for mortgage insurance.
  • Closing costs may be lower.

Whether you’re a seller or buyer in an owner financed home loan, always make sure that the closing is someone who is familiar with the owner financed process (i.e. attorney or a realtor familiar with this type of transaction).  Their guidance can ensure that all contracts are drawn up correctly, so as to be legally binding for both parties.

Difficult financial circumstances can require creative responses.  So many houses now sit empty because conventional mortgages have become more difficult to qualify for.  Someone, somewhere, has suffered a financial loss because they couldn’t sell their home.  Perhaps they didn’t know about owner financing as a viable option for selling their home.  If you’ve gotten nowhere trying to sell your house the conventional way, you owe it to yourself to consider owner financing.
Works cited:

https://www.mba.org/news-research-and-resources/forecasts-data-and-reports/single-family-research/mortgage-credit-availability-index

http://www.investopedia.com/articles/mortgages-real-estate/10/should-you-use-seller-financing.asp

http://www.realtor.com/advice/is-seller-financing-right-for-you/

 

David Ray

About David Ray

David provides viable solutions for sellers, buyers, real estate agents and investors. His areas of expertise include residential, commercial, business and land development. The latest solution is helping sellers with "dated" houses renovate the property for zero cost. Through this solution the seller, the buyer and the community all benefit. After each project is completed, he helps provide thousands of meals to the local food bank.

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