Owner financing is typical in buyers markets when there is a surplus of housing inventory and a limited number of buyers. Owner financing enables an owner to find a buyer who may not be eligible for traditional financing through a bank or other lender, but whose budget allows them to purchase their specific home.
Buyers often decide to opt for seller financing because they have credit problems or because they do not have sufficient documentation to prove their income. Some buyers though, don’t want to deal with a traditional lender, and would rather negotiate with the seller directly.
But what are the specifics of owner financing and owner finance contracts? Connecting with a local realtor is key to navigating these situations.
But you should know the basics of these arrangements to determine if they’re right for you. Here are seven frequently asked questions about this alternative form of financing and the answers.
What is owner financing?
Owner financing is a financing option offered by sellers that enables the buyer to purchase the property directly from the homeowner, either as a whole or in part. Both sellers and buyers can benefit from this type of transaction, as it eliminates the need for a bank intermediary.
How does owner financing work?
Also known as “seller financing,” owner financing typically involves the buyer providing an agreed down payment for the property initially. The loan period of seller financing is rarely as long as the 30-year terms that are popular with traditional lenders. Instead, owner financing loan terms tend to be much shorter and frequently involve a balloon payment.
Executing an owner financed real estate deal typically involves the use of two pieces of documentation: a promissory note and a deed of trust. The promissory note is effectively the buyers promise to repay their debt and stipulates the agreed loan terms.
Typically a real estate attorney is hired to draft the promissory note and other documents.
Is owner financing the same as rent to own?
No. Rent to own merely gives the renter the option to purchase the home at a later date. The landlord is still the legal owner of the property until the renter chooses to execute their right to buy.
On the other hand, in a seller financing deal the property deed is transferred to the buyer as soon as the contract is agreed, making the buyer responsible for paying off the remainder of the loan to the seller.
Does owner financing go on your credit?
For an owner financing agreement to be reflected in your credit history, the lender must meet several requirements such as operating as a business and providing proof of the owner financing agreement.
If the seller meets the applicable credit bureaus’ requirements for reporting, it may be possible to have your agreement reflected in your credit history. If you would like your owner financing loan reported on your credit, you must ask your lender to complete the relevant paperwork and report the mortgage.
Are there closing costs with owner financing?
Yes, you should expect to pay closing costs such as the applicable deed transfer taxes of your state and title or attorneys fees. However, owner financing will save buyers typical lender closing costs, such as the loan origination fee or mortgage insurance premiums.
Although seller financing does not require an appraisal, it is still prudent to have one completed on property you are planning to purchase. You should also consider consulting a local real estate agent and asking them to complete a comparative market analysis on the home to ensure you are making a wise financial decision.
Does for sale by owner mean owner financing?
For sale by owner and owner financing are two different things. For sale by owner refers to the way the property is being marketed and sold; the owner of the home is selling the property independently.
Owner financing refers to the way the home is being financed and means that the owner is willing to allow potential buyers to finance through them as an alternative to a traditional lender.
Is owner financing a good idea?
Whether owner financing is a good option or not depends on your circumstances. Typically if you have good credit history and a stable income, it makes sense to take out a loan with a traditional lender.
On the other hand, owner financing can mean a faster and cheaper closing due to the lack of bank fees.
Owner financing can also be a good investment option for sellers, as they can recoup the property title if the buyer defaults on their repayments, plus the down payment and any payments made.
If you’re considering buying or selling a home via owner financing, speak to one of our Clever Partner Agents before you make a decision. Clever Partner Agents are knowledgeable local agents who will be able to guide you through the pros and cons of owner financing, and also what other alternatives you have.