The Ins and Outs of Owner Financing

What is owner financing anyway?

In the world of real estate, owner financing is when a seller acts as a bank in holding a loan for a buyer. Say the seller has a home that they’ve priced at $200,000. They’ve paid it off themselves, so they own it free and clear.

The buyer cannot qualify for a loan through a traditional lender. The seller, however, is willing to take payments from the buyer until they can qualify for a regular mortgage or until they pay off the financed amount.

The seller sets up the terms of the loan, including a down payment, interest rate, and number of payments.

Owner financing is quite common. It’s also called seller financing or seller carryback or seller carryback financing.

Any type of property can be owner financed, including single-family homes, apartment complexes, condominiums, duplexes, and commercial properties.

Why a Seller Should or Should Not Offer Financing

Offering financing can be great for a seller if:

  • The property has flaws that would prevent a traditional lender from approving a mortgage on it (the roof is at the end of its life, for example); in other words, it could be hard to sell otherwise
  • The buyer defaults on payments; in that case, the seller retains the title of the property and keeps all money paid by the buyer
  • They don’t want to wait weeks for the mortgage and closing machinery to churn to completion

Owner financing does have some risks and drawbacks, though. The seller runs the risk of the buyer defaulting on payments and the seller having to initiate foreclosure proceedings. If the house is damaged and the seller must take it back, the seller has to pay for repairs, upgrades, and maintenance.

Why Owner Financing is Good for a Buyer

Owner financing is the ideal way for a buyer who can’t get a traditional loan to purchase a home. It makes home ownership possible. And because the down payment can be flexible, the amount of it boils down to what the seller is willing to take—which is usually negotiable.

Owner financing is fast, because no one must wait for an appraisal, underwriter, or bank loan officer to approve a loan application.

Owner financing is economical because there are no inspection or bank fees.

Owner financing has some risks and drawbacks for the buyer, just as it does for the seller. In this type of financial arrangement, interest rates are usually higher than on traditional mortgages. There’s also usually a large balloon payment at the end.

A Due-on-Sale clause can also bite the buyer. This is a clause on the seller’s mortgage where the lender stipulates that their loan be fulfilled if the property gets sold. When the property gets sold, the bank requires payment, and that can put the buyer and seller both into an untenable position.

Wrapping It Up

Owner financing can be a great solution for both a seller and a buyer looking to make a house sale happen. It’s a profitable investment strategy for home owners. It’s a way for home buyers with credit issues or loan qualification roadblocks to get into a home.

In some situations, a home owner may just want to sell their home as-is, for cash, and not deal with holding a loan for a buyer. Homebuying companies like Locklear Offers provide solutions for sellers looking to sell quickly and not have to make repairs.

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