What You Need to Know About Owner Financing Homes
Owner financed homes are a way many people buy or sell a home without having to go through the conventional mortgage process. It has some positives, some negatives and some things that are neither but are important for you to know.
The buyer and the seller can both benefit if everything is done right. Problems will happen if one side or the other does not do a good job of crossing T’s and dotting I’s. Owner financing homes require extra work from the buyer and the seller.
What Is Owner Financing?
Owner financing just means the property owner functions as the mortgage company. Instead of making payments to a bank or a mortgage company, the buyer makes his payments to the owner. Typically, the owner holds the property deed until the final payment is made or the buyer gets a conventional mortgage.
Other details about the sale should be worked out in a written contract (see below).
Why Owner Financing?
Why would anyone be interested in owner financing? Here is a look at the pros and cons from both sides.
Buyer Pro
If you need a house in a hurry, owner finance homes can have a fast closing. You do not wait on a lender to make a decision about loaning you the money. It is quite possible to make an offer and move in within the next few days with owner financing homes.
If you already live in the home as a renter, then owner financed rent to own homes means you do not have to move. Depending on how your agreement is arranged, you could keep your monthly bill the same, lower or more. If you are living in the house already, then the owner financing homes near me is built-in. You are in the house. You are making rent payments. The only part to negotiate is the purchase prices and some minor items we discuss at the end of this article.
Closing costs are generally cheaper. You do not pay a bunch of bank fees. The two of you decide on mortgage insurance. You can even decide how to split the costs of recording the paperwork at the courthouse, any commissions to a real estate agent if needed and other fees for getting the sales contract together.
A flexible downpayment is something else you can work on together. Commercial lenders generally require at least 10% down. Some mortgage plans and first-time buyers may be able to do less. With owner financing homes, the downpayment is whatever the two of you agree to.
Since owner financed homes have a non-traditional mortgage, neither of you are bound by the requirements commercial lenders like to tack onto their loans. At the same time, some state and federal laws will apply. We discuss the most important one below.
If you have great credit, getting a mortgage can be easy. If you have so-so or bad credit, getting a mortgage is difficult to impossible. Your credit only matters to the seller with owner finance homes and especially owner financed rent to own homes. If you used to have good credit but had a run of bad luck, you can explain this to one person and hopefully work something out.
Pros for Sellers
If you are looking to sell a property and are willing to finance it, here are some good reasons to consider the idea.
As a seller, your biggest benefit to owner financing is more money in your pocket. Instead of a bank or a commercial lender earning interest, you get to do that. You set the interest rate after talking with the buyer. Even if you set the interest rate below the current mortgage rate, you still make money. You might be able to earn more on the investment than you could by taking the lump sum payment and investing it elsewhere.
You can sell the house as is. Some traditional lenders may require repairs before they loan money to the buyer.
Depending on how you word the sales contract, you may have the option to sell the mortgage to an investor for a lump sum. If you need money fast, this is a good way to get it.
You keep the title until the loan is paid off. If the buyer walks away, you still have the property, plus any money they paid. You do have to foreclose to take the property back. State law and whatever is in the contract spell out how to do this.
Owner financed rent to own homes sell faster. That means you get your money sooner. If you need marketing help with owner finance homes near me, talk with a professional.
Sell faster. You have the definite potential to sell and close faster since buyers avoid the mortgage process.
Under the Dodd-Frank Act, owner-financing restrictions do not apply to rentals, vacant land, commercial properties, and non-consumer buyers, including limited liability companies, corporations, trusts, and limited partnerships. Dodd-Frank does apply to some owner financed sales.
Buyer Con
As the buyer in an owner financing homes for sale arrangement, you must be careful. In fact, you have to be more careful than if you go through a conventional mortgage process. With traditional lenders, you can be fairly certain your mortgage contract protects you as well as the seller and meets all the legal requirements for the sale. With owner financing, unless you hire a real estate professional, you have no guarantee your interests are protected.
You may pay a higher interest rate than with a conventional mortgage. This is not a guarantee. The interest is something you work out with the seller.
Owner finance homes near me still require owner approval for the sale to go through. Conventional lenders have a checklist they follow to make a decision on the loan. When the owner finances his own property, his reasons are his own.
As a buyer, you MUST know about a due-on-sale clause. This is a provision of most conventional mortgages. If the owner has a mortgage on the property, then the lender can demand the loan be paid off immediately if the owner sells, even under owner financed rent to own homes arrangements. This is another reason to get professional when looking at owner financing homes for sale.
Owner financing homes near me sometimes come with a balloon payment after a set number of years. When the balloon payment comes around, your options are limited. They are
1. Make the balloon payment.
2. Refinance the balloon amount.
3. Lose the house.
Seller Cons
Toting the note on a property you sell means your money is tied up until the loan is paid off or you sell the mortgage to someone else. Yes, if the owner defaults, you can foreclose, but that takes time. You also have to wonder about the condition of the property during foreclosure. The buyer might trash the place. You can buy insurance to protect against this, but that is money out of your pocket unless you can roll it into the mortgage payments.
If the buyer walks away, you may be on the hook for expensive repairs.
Can you afford the time needed to get all your money? If you are buying another house, do you have enough to make that sale go through? If the answer is no, owner financing is not for you.
If you have a mortgage on the property, does it have a due-on-sale clause? (See above). Can you pay that loan off if needed? If you have a clear title, this is not a concern.
The Dodd-Frank Act may apply to your sale. The Barnes Walker real estate law firm explains how this federal law applies to owner financing.
Other Stuff
Regardless of which side you are on, you need to know about other stuff involved with owner financed homes.
A Contract
A written contract is a must. Some states do not honor verbal contracts. Also, a verbal contract comes down to “he said, she said” if something goes wrong. With a written contract, everything is spelled out. Get a pro to help write the contract. Both of you will appreciate this.
A conventional mortgage contract is so long because lenders have learned over the years exactly what needs to be spelled out in the loan papers. As lenders and borrowers continue to have disagreements that wind up in court, mortgage contracts will change to reflect new rulings. A pro makes sure all the legal requirements are in the contract.
Who is responsible for the taxes and what happens if the taxes are not paid? The local government can seize property if the taxes are not paid. If that happens, both of you lose. Spelling out who pays taxes is part of the contract.
Both of you need insurance. The buyer needs it to protect his part of the purchase and home contents. The seller needs it to protect his investment. The buyer’s insurance should list the buyer and seller as beneficiaries in the event of a payout. In a payout, the seller should get money equal to the balance left on the loan. The buyer gets the remainder. This can be negotiated.
Closing costs will be less but still have to be figured. Recording the sale at the county courthouse in the deeds department is a must. This protects both of you from someone claiming to own the property down the road. Title insurance is also a good idea. Who pays these one-time fees is something to discuss.
Depending on how you both work the deal, you may have other expenses. Work those out between the two of you.
Get Professional Help
Keeping up with the changes and making sure everything is in writing is why you should get professional help to write the sales agreement or contract.
Another reason to hire a pro is to keep things on a strictly business level. Families split and friendships are torn apart over money. With a written contract, someone may still get hurt feelings, but the contract does state what both sides are responsible for.
You can find owner financing homes near me with a little searching. Real estate agents can list owner financing homes for sale. It just means they get a commission on the sale.
We Can Help Structure Terms For Owner Financed Homes
At Onyx REI we are problem solvers and solution finders. Not every property is suitable for a cash offer for a number of reasons. We are all about professional help and if you want to do owner financing, we are here for you!