A Beginners Guide to Real Estate Owner Financing
Owner financing is a popular alternative to traditional bank financing. This is due to the fact that it offers a number of advantages for both the seller and the buyer. Read on to find out exactly what real estate owner financing is, it’s major benefits and how to ensure an equitable and legally compliant deal.
What Is Real Estate Owner Financing?
With real estate owner financing instead of the buyer obtaining a loan from a bank, the seller lends the purchase price to the buyer. A promissory note is then created with a set interest rate, repayment schedule and details of what will occur in the case of default.
Advantages of Owner Financing for Buyers
Avoids Credit Issues – The FHA recently tightened lending criteria for financial institutions. These new lending criteria mean that only borrowers with a minimum FICO score of 500 will qualify for a loan. In addition, borrowers with a FICO score of 580 or lower, will need to put down a minimum down payment of 10%. These new restrictions mean that it is becoming harder than ever before for many people to obtain traditional bank lending. Seller financing does not require credit checks meaning that it provides an alternative way for people to become home owners.
No Loan Costs – Loan costs including underwriting charges, credit reports, origination fees and other loan costs added onto the original loan by financial institutions are avoided when owner financing is used. This can make a less expensive option for financing a house purchase.
Faster Closing – By avoiding traditional lenders closing can on the property can be completed faster and more seamlessly. Essentially, this is because a third party – the bank – is removed from the deal. Once the buyer and seller have agreed to terms closing can take place.
Advantages of Owner Financing For Sellers
Potential for higher returns – Owner financing offers the possibility of higher returns than they may otherwise be able to obtain. This is especially true given the long term, low interest rate environment. At the same time this return is relatively risk free for the owner as it is backed by the property. If the buyer defaults the owner can simply take back possession of the house that they sold.
Above market prices – Because the owner is providing the opportunity for buyers to purchase a home which they may not otherwise qualify, there is the potential to also to sell the property for above the market price that they would otherwise receive.
Sell the property faster – Finding a buyer, who will also be able to obtain traditional financing, can mean that a property can sit on the market for a lengthy period of time
How to Avoid Potential Problems with Owner Financing
Some sellers are wary of using owner financing because of concerns around clear title to the property or purchasing a property without utilities. These problems can be avoided by taking a few basic precautions.
It is recommended that buyers use the service of a title company to determine whether the seller has clear title to the property. If the buyer is purchasing from a subdivision the title company can check to make sure that the property conforms to the law. If the buyer purchases the property using the services of a real estate professional, the law requires that disclosure in regards to the utilities are made. Lastly a memorandum can be made at the county where the property is located so that there is a legal record of the transfer of title.
Owner financing can be a great way to get prospective buyers into a home that they may not otherwise be able to buy, and allow owners to sell a property on more advantageous terms. By taking a few basic precautions owner financing can be arranged on terms which are fair for both parties.