Fair Isaac Corporation, the name behind FICO, is the oldest and most well-known credit reporting…
Owner financing goes by many names, but they all mean the same thing: Benefits for you! Most real estate transactions follow the same formula. A buyer must meet stringent qualifications before a lender will approve a mortgage.
With owner financing, the property owner finances all or part of the mortgage. This option is helpful for a variety of reasons and it’s useful to both parties. Buyers can access credit when it might otherwise be elusive and sellers can help sell their home faster or enjoy tax benefits when they offer to finance a seller.
How Owner Financing Works
Examples of owner-financed options include:
Land Contract. Marketed correctly, sellers can create a larger pool of buyers and sell their property more quickly with a land contract option. Without a typical lender involved, the loan application and closing process can move fast.
For buyers, no mortgage qualification means they can own their own home despite poor credit. Furthermore, those with unpredictable income, such as salespeople, can still qualify for a home.
All-Inclusive Trust Deeds Also known as wraparound mortgages, this type of seller financing consolidates one or more mortgages under one document. It preserves the security interests of each lender. The buyer obtains a loan for the difference in the sale price and the remaining balance on the seller’s loan. The buyer also takes over mortgage payments. The benefits to the buyer is a smaller loan amount and taking over the seller’s loan could mean a smaller interest rate. Perks for the seller are making the home available to more buyers and selling it at a higher price.
Junior Mortgage Conventionally known as a second mortgage, a junior loan helps a buyer who is unable to qualify for a loan for the full value of the home. It’s used as a down payment or to make up the full selling price. This type of loan is a useful tool for both parties. In tight markets, a seller may make this option available to close on the house quickly. Buyers benefit by not immediately having to furnish the full selling price of the home, possibly buying time for credit improvement.
The Bottom Line
Remember that buyers don’t receive the deed to the home until the loan is satisfied. An equitable title is issued and it entitles the buyer to the equity built in the home while it was under contract. Making timely payments under a land contract improves your credit and that improves your chance of obtaining a loan.
There are many other options available for owner financing. Seek professional help in all circumstances to ensure protection to both parties. Real estate agents and brokers, and attorneys should can help create the legal documents and satisfy all state and local regulations.