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Owner financing is a method of home financing in which the owner of the property holds the loan for the buyer. Owner financing is also known as seller financing or seller carryback. In owner financing, the home buyer pays their monthly mortgage payment to the home seller. The terms of the loan and the interest rate are similar to traditional bank financing, with agreed-upon rates and terms.
Owner financing may go 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
Owner financing is a legal transaction, like all other real estate transactions. Both parties are legally bound by the agreement. The seller and the buyer come to terms on items such as down payment, interest rate, loan amount, and length of the loan.
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. 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 and preserves the security interests of each lender. Instead of taking out a loan for the entire price of the home, 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 benefit 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.
Assumable Mortgage With the lender’s approval, the buyer can take the seller’s place on some types of mortgages. One big advantage to the seller is that the lender disperses the equity upon assumption of the loan, so there’s no wait for their funds. An assumable loan may be an enticing perk to a buyer, allowing the seller to request more for the home. Buyers can avoid qualifying for new loans in some cases, and also eliminate closing costs.
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 for both parties. Real estate agents and brokers, and attorneys should help create the legal documents and satisfy all state and local regulations.