The National Association of Realtors estimates that due to the tighter lending requirements, home sales have been held back about 15% recently. This has been frustrating for both home buyers and sellers.
Even some lenders with higher credit scores are finding it difficult to qualify for loans. Some are finding it hard to meet the down payment requirements as well as paying the private mortgage insurance for some government backed loans.
Owner financing has become more intriguing to more potential home buyers and sellers. If both parties adhere to state regulations, use reputable sources to work through the transaction including your real estate agent and attorneys to protect both the seller and buyer, this may be a better alternative for both sides.
What is Owner Financing?
The concept is simple, the homeowner most if not all of the buyers note. What this means is that typically the buyer pays the buyer a down payment, making monthly payments over a time period mutually agreed upon time frame and interest rate until the debt is fully paid.
Benefits to sellers
The seller then becomes the bank so to speak, he or she assumes the same risks such as defaults. If the buyer defaults the seller can repossess (or foreclose) the home just like a bank. The seller also reaps the rewards like getting market value and monthly interest payments.
Another seller benefit is that the seller can sell their home without mandatory inspections or other requirements of FHA and conventional loans.
Owner financing is similar to rent-to-own deals between seller and buyer where the seller pays rent to the owner until he or she has paid enough for a conventional down payment. In this case the seller keeps some of the money while the remainder is kept in a trust. When enough money has accumulated for a conventional down payment, the buyer uses that money to “refinance” with regular bank which – like regular loans pays off the seller.
Benefits to homebuyers
This is an option for buyers who, for whatever reason, do not meet the requirements of conventional loans. This doesn’t just mean buyers with low credit scores, but also buyers that have good credit but are having difficulty with the 20% down payment.
Because a deal is worked out between the seller and buyer, it is possible that the buyer can finance the home with little or no down payment. Part of the reason is the seller can take that chance on the buyer because he or she will be collecting monthly interest making up for the lack of initial funds.
The other benefit for buyers is that they can start enjoying the benefits of homeownership, including rising equity and tax benefits right from the start.
The Risks in Owner Financing
The biggest risk for sellers is that the buyer will stop making payments and destroy the property. As bad as that can be, under those conditions, the seller can take the property back and depending on the contract, the buyer loses whatever money they put into the house to that point.
The buyer’s risk is that the seller is not paying the mortgage and the house goes into foreclosure losing any money already invested. Another risk is that the buyer doesn’t have clear access to the title.
Now, your agent and perhaps some family and friends may think you’re setting yourself up to fail by selling your house through this method. But with proper protections for both sides any problem is manageable. The best advice would be to consult a real estate attorney and your real estate agent for assistance.
Comments (0)Subscribe to CommentsComment