Financing a Mortgage Loan by using Owner Financing
Seller Financing is essentially purchasing a property without traditional financing where the seller of the home actually becomes the bank. They receive the money as monthly payments over an agreed upon period of time rather than a lump sum all at once.With slow home markets in many national areas, and more people that can't qualify for a traditional mortgage, Owner financing is becoming more popular.
Some other options to purchase homes without gaining a traditional mortgage loan include purchasing house with a lease option, or rent to own.
Advantages of Seller Financing
No Money Down
Owner financing can potentially allow you to put no money down on a home loan. Many traditional loan products do require a substantial down payment depending on your credit/income history. Depending on what the seller owes on their loan, they may be able to do a wrap around mortgage where they offer the financing and don't even have to pay off their existing loan.
Reduces Closing Costs
Seller financing greatly reduce closing costs as there is no origination fee, loan processing fee, or even appraisal fee required.
Opens doors to the American Dream of Home Ownership
Financing through the seller can allow home ownership to buyers who cannot get a traditional home loan. Thes buyers are usually those with poor credit or job history. Financing through the seller opens up doors of home ownership for people who may not have a steady job history or debt to income ratio that will be approved by traditional home loans.
Disadvantages of Seller Financing
Higher Interest Rates
The interest rate charged for owner financing is usually more than the going rates set by banks. This is not always the case however, I have seen seller financing where the APR was actually less than what a bank would have charged.
Less Selection of Houses to Choose
Much less selection. Less than three percent of listed homes will offer seller financing. For most home owners this is not an option because the mortgage loan they signed has a "due on sale" clause where their mortgage note will need to be immediately repaid in full if the deed is transferred out of their name.
If you can only purchase a house by seller financing, you cannot be picky.
How to Find properties that will allow Seller Financing.
A small percentage of homes for sale will offer seller financing. Most home sellers are not aware that it is even an option, and most people need the proceeds from their equity immediately so they can move on. Others just don't want to play the part of a banker.
Homes listed on the MLS sometimes state that an owner financing is an option. This information is only available on the Realtor version of the MLS, and the client access will not tell you this information. You must contacta real estate agent to let you know which MLS listings do offer seller financing.
People who may not be aware of seller financing may be willing to offer financing if they have been unable to sell their house for a long time. Houses with wierd qwirks and less than desirable locations may be willing to seller finance. Look for vacant houses and properties that have been on the market for more than a year to see if they will consider a seller mortgage or wraparound home loan.
How to Obtain Owner Financing
Seller financing terms must be set forth in the Real Estate Purchase contract. The UAR has a standard addendum form that has legal terms necessary for owner financing. Your Realtor will help protect you in an offer contingent on seller financing.