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In 2008, about 32 percent of all American homeowners owned their homes free and clear, according to a U.S. Census American Community Survey.
In seller financing/owner financing/creative financing, the purchaser will still make some sort of initial or down payment to the seller; then will make regular installment payments over a specified time, at an agreed-upon interest rate, until the loan is fully repaid. This happens when the seller in a transaction offers/agrees to give the buyer a loan rather than the buyer obtaining one from a bank.
To a seller, this is an investment in which the return is guaranteed only by the buyer's credit-worthiness or ability and motivation to pay the mortgage. For a buyer it is often beneficial, because he/she may not be able to obtain a loan from a bank.
There are no universal requirements mandated for seller financing. In order to protect both the buyer's and seller's interests, a legally binding purchase agreement should be drawn up with the assistance of an attorney or a real estate broker, and then signed by both parties. This ensures that if any problems should arise in the financing or agreed upon terms both parties can be protected. Essentially the loan is secured by the property being sold.
In the event that the buyer defaults, the property is repossessed or foreclosed on exactly as it would be by a bank.
So why would a seller offer this kind of financing without the expertise of a bank?
In seller financing, the seller functions as a direct lender, with the buyer making monthly mortgage payments to the seller instead of a bank. Buyers who accept seller financing usually cannot qualify for a traditional mortgage loan, often because of credit score.
Because of this risk the sellers take in this particular financial transaction, they can determine the interest rates and contract terms to guarantee a better return than many other types of investments would.
Buyers without the ability to get a mortgage can even use the seller financing as a stop gap measure until refinancing can be secured by a bank to improve credit ratings.
If a property is in bad condition or the owner has a vacant home sitting on the market for a significant period of time, then he may consider owner financing. This kind of financing may ensure a quicker sale or the sale of a property which may otherwise be difficult to sell.
There are benefits and risks to seller financing, but for many people in the housing market this is the best option.
Benefits of Owner financing for both Buyer and Seller:
- First, the chances of making a quicker sale are higher.
- Closing may also be easier since one does not have to wait for the mortgage to be approved by a lender.
- Buyer can save money in the form of origination fees and other lender fees.
- Paperwork is comparatively less extensive.
- A large down payment may not be required and the appraisal may also be skipped.
- Buyer and Seller can work out the terms of the agreement together – there is a certain degree of flexibility involved.
- Seller may obtain a higher price if he meets the terms of the buyer.
- Seller may secure future income in the form of interest payments.
Contact me at HomeLandInvestment@gmail.com for more information on how seller financing can work for you.