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Lately it seems I have been getting more and more request from new clients for homes that are Owner Financed. That is not an issue, as a matter of fact owner finance is a great way to own your first home! With that being said there are a few things you must know before even considering an Owner Financed home.
What Is Owner Financing?
When the seller decides to sell his home and be the bank at the same time. In this situation the seller will finance the home to the buyer personally meaning the interest rates and down payment may very extremely.
Owner Financing Benefits to Home Buyers
Little or No Qualifying.
Even if the seller demands a credit report on the buyer, the seller's interpretation of buyer qualifications are typically less stringent and more flexible than those imposed by conventional lenders.
Unlike conventional loans, sellers and buyers can choose from a variety of payment options such as interest only, fixed-rate amortization, less-than-interest or a balloon payment. Payments can mix and match. Interest rates can adjust periodically or remain at one rate for the term of the loan.
Down Payment Flexibility.
Down payments are negotiable. If a seller wants a larger down payment than the buyer possesses, sometimes sellers will let a buyer make periodic lump-sum payments toward a down payment.
Lower Closing Costs.
Without an institutional lender, there are no loan or discount points to pay. No origination fees, processing fees, administration fees or any of the other assorted miscellaneous fees that lenders routinely charge, which automatically saves money on buyer closing costs.
Because buyers and sellers aren't waiting on a lender to process the financing, buyers can close faster and get buyer possession earlier over a conventional loan transaction.
Down side for buyers.
The seller has every right to ask for the interest rate and down payment they want, for example in the Houston market the lowest interest rate I have seen is %8.5 and the down payment in the %20 range. Buyers will see this and say “this house is not worth 50,000 over market value” what is important to remember is that the buyer is paying for not being able to purchase a home with a regular bank loan. In many occasions there is no early payout penalty, meaning when the buyers credit is good enough they can refinance the home get a lower interest rate therefore paying less.
Owner Financing Benefits to Home Sellers
Higher Sales Price.
Because the seller is offering owner financing, the seller may be in a position to command full list price or higher.
The seller might pay less in taxes on an installment sale, reporting only the income received in each calendar year.
Payments from a buyer increase the seller's monthly cash flow, resulting in spendable income.
Higher Interest Rate.
Owner financing can carry a higher rate of interest than a seller might receive in a money market account or other low-risk types of investments.
Shorter Listing Term.
Owner financing attracts a different set of buyers. If a property is not selling under conventional methods, offering owner financing is one way to stand out from the sea of inventory and move a hard-to-sell property that otherwise might not sell.
In closing, before entering into a transaction with owner financing, please consult a real estate lawyer and obtain competent legal advice. Do not rely on your real estate agent for information, unless your agent is a practicing real estate lawyer.