Purchasing a home is one of the biggest investments most people make in their entire lifetime. That’s the reason the entire process should go as smoothly as it possibly can.
However, there may arise a few complications like the mortgage lender rejecting the buyer’s loan application, which may result in the deal crashing.
Mortgage rejection is one of the major reasons why most real estate deals crash.
While applying for a home loan is the only option most home-buyers have, you can’t rule owner financing out of the equation.
This blog post heavily focuses on all the ins and outs of owner financing, helping you clearly understand what it’s all about and whether it’s a thing to look into.
Let’s get straight into it.
What’s Owner Financing?
Also known as seller financing, owner financing refers to a property financing tactic in which the home-seller or home-owner holds the home-buyer’s loan.
Few other names for owner financing are seller carryback or seller carryback financing.
Its functioning is similar to a bank’s.
The only difference is that here, the buyer will be repaying the seller in the form of monthly payments over a fixed period of time with specified terms and interest rate.
Owner financing is one of the most adopted methods by investors, however, if you are a homeowner, you can easily adopt it.
It’s one of the most viable options. And it’s more common than you may be thinking.
Talking about restrictions, there aren’t any in terms of the types of properties that can be bought or sold or who can harness the power of this tactic.
Most home-buyers purchase single-family homes, duplexes, apartments all the time with owner financing.
To help you have a practical understanding, we have come up with an example.
Let’s say you are a home-seller and you are listing the property for $200,000. If one of your potential home-buyers is self-employed, maybe his/her loan application may get rejected.
In that case, he/she may make a full-price offer. He/she may request owner financing with 15% down.
Considering you don’t have a mortgage on your property, you may choose to accept it. Here, you will be creating a mortgage note that’ll require your buyer to pay you back in the course of 10 years at 8% interest. It also includes a balloon payment in the end.
Let’s calculate the numbers.
| Loan Factor | Value |
| Buying Price | $200,000 |
| Down Payment | $30,000 |
| Loan Amount | $170,000 |
| Interest Rate | 8% |
| No. of Payments | 180 |
| Balloon Payment | $130,528.65 |
| Monthly Mortgage Payment | $1,247.40 |
| Total Amount Paid to the Seller | $224,532 |
That being said, let’s look at the pros and cons of owner financing to have a better understanding.
Firstly, let’s talk about the pros and cons for buyers.
Pros & Cons of Owner Financing for Homebuyers
Pros
Pros include:
- Faster Closing: Here, you won’t have to wait for underwriter, bank loan officer, legal department to review and approve your loan application.
- Flexible Down Payment: No government or bank-required minimums
- Cheaper Closing: No appraisal costs or bank fees involved
- Good Option for Buyers Who Can’t Get Financing
Cons
Cons include:
- Requires Seller Approval: Not all sellers offer owner financing, so you’ll have to ask your seller
- Higher Interest: Interest rate is higher when compared to bank.
- Balloon Payments: You’ll have to pay a large balloon payment in the end.
- Due-On-Sale Clause: In case the seller has mortgage pending on the property, then bank may demand immediate payment to the seller upon selling the property to the buyer. That’s because there’s a due-on-sale clause on the mortgage.
Pros & Cons of Owner Financing for Home-sellers
Pros
Pros Include:
- Can Sell Your Home “As-Is:” You may not have to invest money in costly repairs which is required by the traditional lenders.
- Retain Title: Upon buyer defaulting, you will be able to keep the down payment and any amount paid for the house.
- Good Investment
- Sell Home Faster: You won’t have to wait months before the buyer’s mortgage application is approved.
Cons
Cons include:
- Default: The buyer can stop making payments altogether at any given time. If such kind of thing happens and if they choose not to walk away, then it may result in foreclosure.
- Repair Cost: If you choose to take the property for any reason, you will have to pay for maintenance or repairs.
Conclusion
Owner financing is a good option for both homebuyers and home-sellers.
And if you are a homebuyer wanting to purchase your dream house, yet have a poor credit score or lower chances of your mortgage application being approved, then you may ask the seller to offer owner financing. For home-sellers, it’s a good investment and a highly-profitable option.