Owner Financing for Buyers
Buyers can reap many rewards with owner financing. Being able to obtain financing from the owner of a property generally means that the transaction proceeds more quickly than with a conventional mortgage. It also may allow a qualified buyer to purchase with a lower down payment than the 20% required by many banks. Sellers typically do not charge buyers points on an owner financed mortgage. And, while a seller will perform a credit and background check, the requirements may not be as strict as with bank financing.
Lower closing costs are also an advantage of owner financing. Sellers usually have already obtained an appraisal and survey, and won’t require additional lender inspections other than those mandated by local and state government for obtaining a certificate of occupancy. Depending on the type of arrangement, title insurance may not be necessary.
For the buyer who is rebuilding credit, owner financing can be a great opportunity. Terms of the loans vary widely, and may include lease purchasing, assumable mortgage, or a type of joint ownership until the loan is paid in full. Payments are recorded, and a 1099 should be issued showing interest payments, same as with a bank loan. Also, the terms can be negotiated if the seller is agreeable. For example, a seller might extend the terms of the loan from 10 years to 15.
Owner financed mortgages are frequently shorter term than conventional bank loans. Some include balloon payments at the end of the loan. The idea is that the buyers finances may have improved over time, and they can expect to refinance the loan.
Buyers need to know that they are protected in any real estate mortgage transaction by the Safe Act and Dodd-Frank Act. The seller needs to issue appropriate disclosures about rate, terms, payments, and special conditions. Both parties should seek the advice of qualified real estate attorneys.
Buyers should expect to complete a loan application and be verified with a background check and credit check, just as they would with a bank. A seller generally has more flexibility in evaluating their risk and the buyer’s suitability for the loan.
Finally, the period from contract to closing is generally quicker than with bank financing, as sellers do not require surveys, appraisals, and inspections. A transaction that is well put together may close in as little as ten days in some cases. This makes owner financing very appealing to the buyer who is also an investor.