Owner Financed Home Sales Top Ten Questions
After a long period of low mortgage interest rates, the loan market has begun to tighten. As recently as 2012 mortgage rates bottomed out at an all-time low of 3.35%. Even as recently as fourth quarter 2015, rates were still below 4%. Those low numbers are about to change according to the Mortgage Bankers Association (MBA). Their forecast is for rates to be at 5% by the end of 2016. What does that mean for home buyers?
When mortgage rates rise or when regulations begin to tighten (which they have), loans become more difficult to obtain. Lending institutions aren’t so willing to loan to just anyone. That means borrowers with sketchy credit histories will need to be creative when they’re trying to finance a home. As a result, they’re left with few viable options for buying a home. Not only does that hurt buyers, it hurts sellers.
Higher mortgage rates and tougher regulations can hit sellers just as hard as marginal borrowers. With fewer home loans available, homes become more difficult to sell. Home sellers will need creativity, just like borrowers, if they’re going to have more than a slim chance to sell.
Is there a solution available for different borrowers looking to purchase a house? What options do home sellers have in a tightening market? It appears an answer is at hand. Owner financed home selling is that answer.
Since owner financed home sales are still somewhat of an oddity, not much is known beyond the realms of mortgage and real estate financing. We’ve put together a list of ten questions that will help illuminate the practice of owner financing.
1. What is owner financed home selling?
The answer is in the question. In place of a bank or lending institution granting a home loan for a home sale, the owner of the property lends the money for the purchase to the buyer. The buyer and seller work together to agree on mutually beneficial terms and price of the loan.
2. Will the loan be a standard 30 year loan?
It all depends upon the parties involved and what their goals are. Many sellers will carry a loan that will range from 5-25 years. Often times, buyer and seller will agree on a 5 to 10 year contract. The major difference with a shorter loan term is the balloon payment due at the end of the contract. A 5-7 year loan for example is sometimes made in the event that the buyer’s credit improves sufficiently during that time for them to finance the remaining amount by conventional means.
3. How is the interest rate determined?
The Seller and the Buyer both work together to determine a mutually agreeable number that will satisfy each party.
4. Will the interest rate be higher or lower?
The seller is bypassing the usual loan process (banks, mortgage lenders), therefore they have no reason to charge fees such as points, yield spread premiums, commissions, or other mortgage costs. This can create a win for both parties involved many times there is zero interest because of the terms and price that is worked out between the buyer and the seller. There are many reasons for this scenario that we may go into in another article.
5. Can the deal be made without a down payment?
A down payment amount, or lack thereof, is something agreed on between seller and buyer. It is possible, if the property being sold needs repairs, that the seller will forgo a down payment and give a monthly credit to the buyer for the repairs, freeing the buyer to make repairs with the cash that would have been a down payment. This facet of the owner financed deal can make a less desirable property more marketable.
6. Which party is responsible for the paperwork?
Buyer and seller may enlist the aid of an attorney (experienced in real estate) or realtor for drawing up of the contract for the sale of the property, promissory note, and any other required paperwork.
7. Will the purchase affect the seller or buyer’s credit in any way?
Only for the buyer, and then only if the seller reports the debt to a credit agency. Otherwise, the seller/buyer agreement will have no positive, or negative, effect on either credit score.
8. Can owner financing be used as a sales tool for the seller?
Absolutely! If the seller wants to bypass conventional lenders, or hasn’t been able to sell their house due to interest rates, ownership financing can be the selling tool that finally gets them out from under a property.
9. As the seller, how can I protect myself?
You should require the buyer to fill out an agreement, have the loan secured by the home (in case of a loan default), and request a reasonable down payment (unless agreed otherwise).
10. As the buyer, how can I protect myself?
Make sure the property is owned free and clear by the seller. Buying a property that is still under a bank mortgage can cause more than a few headaches, because of the Due on Sale Clause. However, there are other legal alternatives that a buyer and seller can consider if there is a mortgage on the house.
Owner financed home sales can be very helpful for all parties involved. Regardless of which you might be, seller or buyer, make sure you consider your options before jumping into an agreement such as this. If both sides feel this is a win-win solution, then owner financing can be the break they are looking for.
https://www.lendingtree.com/mortgage-rates/mortgage- rates-what- to-expect- in-2016- article
http://www.nolo.com/legal-encyclopedia/seller- financing-home- sales-30164.html
http://www.business.com/business-loans/buying- a-business- seller-financing- pros-and- cons/