Rent to own, lease purchase, FSBO, For Sale By Owner, and Owner Financing are words that often get tossed around by folks who are interested in finding alternatives to traditional financing methods.
For Sale By Owner
Ever see a FSBO sign in a yard?
What this means is that the Seller is not represented by a listing Broker.
IT DOES NOT MEAN THE SELLER:
- is willing to offer owner financing terms (they might, but you have to ask)
- will or won't cooperate with a broker representing a buyer (they might, but you have to ask)
- will let you lease the property and count your lease payments toward a purchase price
- will consider leasing instead of selling
- will cosign a mortgage note on your behalf
- has priced the home correctly
- is desperate to unload the property and will drop the price to a "steal of a deal"
- knows what he or she is doing to handle a real estate transaction properly
- is really the true owner of the home (you've got to check these things out!)
- will answer the phone, return your call, or let you see the property
- has no mortgage left to pay on the property (owns it outright)
What is Owner Financing?
Owner financing, also known as seller financing, occurs when a prospective buyer and seller execute a promissory note, which is basically an IOU that contains the promise to pay a sum of money in accordance with stated terms relating to amount(s), rate, duration (number of years), and consequences of breach of agreement.
Unlike a mortgage or deed of trust, promissory notes are not recorded. The seller (in this case, "lender") holds the promissory note while the loan is outstanding, and when full paid off, marked as paid in full and returned to the borrow.
Owner financing terms customarily charge higher rates than traditional financing methods (usually somewhere between 10% - 20%), expect significant down payments (10% - 20% down), and typically are offered as short-term solutions (ranging between 3 - 7 years).
IT DOES NOT MEAN THE SELLER:
- isn't checking credit or doesn't require a minimum credit score for buyers to qualify for the financing
- is offering "no money down" or 100% financing
- won't demand a significant down payment amount
- will continue to pay the existing mortgage note, taxes, insurance, or maintain the property financially or physically
- will properly convey title (watch out for "Contract for Deed" arrangements!)
- is agreeing to better terms than buyers could get using traditional financing methods
- will agree to extend or modify the terms if the buyer cannot qualify for refinancing at a future date
- has secured permission from an existing mortgage lender to "wrap" his or her note -- this can be especially worrisome, as when things are not handled properly, an existing mortgage note can be "called", leaving both a buyer and seller in a bind
What is Rent to Own or Lease Purchase?
Another "creative" financing solution that comes up frequently is a "lease purchase".
People ~*think*~ this means they will be able to rent a home, putting no money down, paying no interest, and have their landlord agree to "count" the rental payments toward a purchase price at a later date. Essentially, the misconception is that rental payments will equate to a down payment, and that the Landlord / Owner is "owner financing" the property.
WHAT IT REALLY MEANS
For starters, the words "rent to own" or "lease purchase" means "get a lawyer". In Texas, licensed real estate agents can assist parties with a straight lease, or a straight purchase -- but for any blended agreement, it will take an attorney's involvement to facilitate the paperwork and process.
Buyer should also understand that blended agreements are generally not offers of owner financing. The expectation in each of the 3 basic flavors of blended agreements (described in detail by Elizabeth Weintraub in this online article: Lease Options and Lease Purchase Sales) require buyers to secure their own outside financing.
Affordable Options for Credit or Capital Challenged Buyers
Cheer up, Kiddo. It's not all doom and gloom. The solution is looking for love in the right places!
Here is a quick list of several affordable alternatives that can help:
Traditional Financing: Often, a buyer's financing profile isn't as bad as they might fear it is. Consulting with a knowledgeable mortgage lender can bring valuable information to the table. From no and low money down financing programs, to down payment assistance & first-time home-buyer programs, or credit repair programs -- working with the right lender can solve a world of problems. Many of our preferred lenders are licensed to do business across the United States, so no matter when you live, if you need a referral, call us. We can help connect you with a great lending partner and Realtor® who serves your area.
NACA: This lender doesn't scrutinize credit history. For best results, buyers should partner with Realtors® who are familiar with NACA's program. They offer no money down, pay for all closing costs, allow seller contributions up to 6% of the purchase price, don't require PMI, and can even work with ITIN borrowers. If you would like to be referred to NACA, please contact us. We can connect you with the nearest NACA office and a qualified real estate professional in your area, no matter where you live.
HOME PARTNERS OF AMERICA: First, your Realtor® must initate referral to this program. If you aren't working with an agent, contact us. Home Partners of America will buy homes FOR folks who will first lease, and then purchase when they are better qualified in 1 - 3 years. To go this route, credit is a consideration (see https://www.homepartners.com/how-it-works/program-summary). They also require a minimum income, and clean criminal and rental history.
When the allure of a FSBO doesn't materialize into the dream solution it was imagined to be, don't give up. With the right professional guidance and resources, home ownership can be yours.