There are many credit issues such as credit scores, derogatory credit, employment history, cash available and debt to income ratio that can make qualifying for a mortgage a challenge. Owner financing may be a solution when a buyer is not able to get a mortgage through a lender.
What incentives might a seller have for owner financing? Most often times, none. That being said, like a buyer, the property also needs to qualify for the loan. Some properties are difficult to get financing on. This can be due to issues with the title, easement, access or other issues. It can be due to environmental problems. Often times a property will not qualify for a mortgage because of the condition or type of structure on the property.
There are other circumstances unrelated to the property where owner financing may be beneficial to the seller. These will normally be tax and income related. Owner financing may help avoid or defer a large tax burden. It can also supply an income over time which may be more beneficial than a lump sum. When the owner finances the property, they also get the benefit of the interest that was negotiated.
For an owner to consider financing the buyer’s purchase there needs to be a challenge that they are trying to overcome or some other type of benefit to them. The owner will be taking on a substantial risk as well as having their money tied up.
More often than not, owner financing is not even an option. The property needs to be paid for free and clear or very close to paid off for it to be a viable option. In today’s lending world, it is nearly impossible to wrap a loan. In other words, the current mortgage will need to be paid off in full at closing.
When an owner is able to finance a sale, they will offer times require a large down payment and a higher than market interest rate. There may also be a balloon payment after a period of time. This may require the barrower to find other financing down the road.
Let’s look at this from the seller’s perspective. A large down payment will lower their risk. A higher interest rate will pay them for their risk. A balloon payment will limit the duration of their risk as well as the duration of their money being tied up. The balloon payment will give the buyer time to get any credit issues resolved.
Owner financing will likely require an escrow service. The barrower pays the escrow service and the escrow service pays the seller. Normally the escrow service will also pay the taxes and insurance from money that they collect from the buyer. This helps to reduce the risk extended by the seller.
If owner financing is an option for the seller, it will most likely be mentioned on the listing. When it is on the listing, it will often mention how much down payment that they will require. The owner will still have the right to accept or refuse the buyer’s offer and the terms of the financing will need to be negotiated.
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