The vast majority of residential real estate financing transactions adhere to a predictable pattern. A lending institution funds the transaction after the seller finds a willing buyer with the necessary income, employment history, and credit score to qualify for a mortgage.
But what if conventional financing is unavailable and both the buyer and seller desire to sell privately? They employ a technique known as owner financing. As the name implies, the person selling the house pays for the acquisition.
Owner financing occurs when the owner of a property for sale provides the buyer with partial or full finance immediately after the buyer makes a down payment. The seller assumes the role of the bank or lender in a standard mortgage. You’re entering into a contract in which the buyer pays you monthly rather than a lump sum from a traditional lender.
Example Of Owner Financing
Assume a seller promotes a house for $145,000 with owner financing and the buyer and seller reach an agreement on a price. The seller requests a $29,000 down payment as a 20% deposit. The vendor offers to finance the remaining $116,000 over 20 years at a ten percent fixed interest rate with a six-year balloon payment.”
Types Of Owner Financing
Owner financing comes in a variety of forms. Each has its own set of benefits and drawbacks:
If the buyer is unable to acquire a conventional mortgage for the full purchase price of the home, the seller may issue a second mortgage to cover the shortfall. The second mortgage is frequently for a shorter term and at a higher interest rate than the first loan obtained from the lender. If you have a shorter term, you must be prepared to pay it off when the time comes; otherwise, you will be forced to refinance.
The homebuyer makes agreed-upon payments to the seller under a land contract. When the payment plan is completed, the buyer obtains the deed to the property. Because a land contract usually does not include a bank or mortgage provider, it can be a faster way to secure home financing. However, there is a major risk because many states allow sellers to foreclose if you miss a payment.
A lease-purchase arrangement obligates the homebuyer to rent the property from the owner for a specified period. The buyer gets the option to purchase the home at a predetermined price at the end of that period. Typically, the buyer must make an initial deposit before moving in, and the money is forfeited if the home is not purchased. If you are the buyer in this situation, you should negotiate the option price and make it contingent on financing, clear title, and other conditions, just as you would if you were buying a home the traditional way.
Wraparound financing is provided to home sellers who owe money on their property. In this situation, the owner agrees to sell the property to the buyer in exchange for a down payment and monthly loan payments. The funds will be used to pay off the seller’s existing mortgage. The buyer frequently pays a higher interest rate than the seller’s current mortgage. If the seller defaults on the underlying loan, you could lose the house. This agreement requires the assistance of an experienced attorney.
How To Do Owner Financing When Selling A House
Find a Qualified Buyer
It is not difficult to locate a buyer looking for owner financing. If you’re confident you want to offer this incentive, you can include it in your listing agreement, but the buyer will most likely contact you with the suggestion.
Assure that a prospective buyer completes a loan application and thoroughly validates the facts contained within. Conduct a credit check. Check references and validate work and earnings. Do everything a conventional bank does before authorizing a loan.
You can avoid all of these problems by using Nea Rental Properties. Nea Rental Properties is a Northeast Arkansas real estate investment firm specializing in the acquisition, development, and management of single-family, multifamily, and commercial properties in Jonesboro, Paragould, and surrounding communities.
If you need to sell your house, we would be delighted to make you an offer (this is where owner financing comes in). Please let us know if you need to rent a property; we rarely have vacancies, and when we do, they go quickly.
We buy houses in all shapes and sizes and under all conditions.
Coming to an Agreement
You are still entitled to and should seek, a down payment, just like a buyer with a traditional mortgage. The difference is that you have greater leeway in negotiating the amount because you are not bound by government or banking institution rules. It’s all up to you, and it might be determined by how much money you need to take out of the sale to comfortably move on to a new residence. By accepting owner financing, you’re doing the buyer a huge favor, especially if you agree to accept less than 10% down, so feel free to ask for a somewhat higher interest rate than a traditional lender would require.
Because you don’t want to be collecting on the sale of your property for the rest of your life, owner financing is usually short-term. Owner financing is often for five years, with interest amortized over 15 or 30 years but with a balloon payment that puts the loan due in full in a considerably shorter period of time. When the balloon payment comes due at the end of your loan, your buyer will refinance the property to pay you off. If you wish to use such terms, make sure it is appropriately specified in your loan documents.
When you conclude an owner financing transaction with Nea Rental Properties, you can reach an agreement with us. We’ll make you an offer, and if you don’t like it, we’ll bargain until we reach an arrangement that works for both parties, the house seller, and us, the real estate investment firm.
Another advantage of selling to Nea Rental Properties is that you can complete your owner financing transaction in 3 years or less.
It’s time to create the documentation when you and the buyer have agreed on the loan period, down payment, interest rate, payment schedule, and what happens if he defaults. You may want to seek the advice of a professional, such as an attorney or a financial counselor, to ensure that everything is done correctly. Even minor grammatical flaws in these agreements can cost you money in the long run. You can frequently work with a loan servicing provider to oversee your loan as it progresses, collecting payments and mailing statements and tax documents to your buyer.
At the absolute least, a promissory note, also known as a deed of trust in some states, is necessary. It should specify the property as security for the loan, allowing you to foreclose if the buyer defaults, exactly like a regular lender would.
Prepare to relocate and leave your home as soon as an agreement is reached. This type of transaction normally closes fast because you don’t have to deal with the multiple parties involved in a typical real estate transaction.
Protect yourself by recording the promissory note in the public records of your county.