Being turned down for a mortgage is disheartening, especially if you’ve worked hard to get one.
But it doesn’t mean it’s the end of the line for your homeownership dream.
There are other options and one of them is seller, or owner, financing.
What is owner financing?
“Owner financing happens when a property’s seller finances the purchase for the buyer,” according to Jean Folger at Investopedia.com.
It differs from a bank loan in that the seller doesn’t provide cash to the buyer, but instead, extends credit.
Seller financed loans are typically short term. They are ideal for the buyer who has met challenges qualifying for a bank loan or meeting traditional credit score requirements.
The homeowner who owns his home free and clear is in the best position to offer financing. Those that still carry a mortgage typically need their existing lender’s permission to offer financing.
The challenge for the buyer seeking seller financing is finding a seller willing to help him out. Most sellers are reluctant to finance — less than 10 percent do – mainly because of the risk that the buyer will stop making loan payments. It is possible, however, to reduce the risk of default.
To get tips on how to reduce the risk, visit Nolo.com.
Then there are the legal and logistical hurdles to overcome. Combined, these challenges convince many sellers that financing the buyer is too much work.
If you need to get the home sold, however, it could turn out to be a blessing.
Benefits for sellers
The biggest benefit for homeowners is the sizable return on investment they realize with seller financing.
Borrowers who typically seek seller financing are considered a higher risk than others. Because of this, sellers commonly charge 8 or 9 percent interest on the credit extended, according to Michele Lerner at BankRate.com.
Offering financing is also beneficial in a buyer’s market, with lots of other homes on the market. It opens your home to a larger pool of buyers and may help sell the home quicker.
The seller is released from paying property taxes, homeowners insurance and maintenance expenses, according to Scott Steinberg at RocketMortgage.com.
Additional seller benefits include:
- A faster closing than would be had during the traditional mortgage process.
- No closing costs.
- The possibility of selling the home as-is.
- “Potential to earn better rates on the money that you raised from selling your home than you would from investing the money elsewhere,” suggests Folger.
Benefits for buyers
Seller financing can be a bonanza for buyers with less-than-perfect credit who can’t obtain financing from a traditional lender. Down payment requirements are typically lower as well.
The terms of the loan are negotiable so , while it is unlikely, it’s possible that the buyer may be able to get a better rate than what banks offer. Depending on how the loan is structured, buyers may also get the tax benefits of homeownership.
Types of seller financing
Sellers can choose from a variety of financing options and much of the choice will be based on the buyer’s financial situation. Here’s a quick look at a few of the more common types:
Assumable mortgage – This type of seller financing allows the buyer to take over the seller’s existing mortgage. Not all mortgages are assumable but VA loans and some FHA and conventional mortgages are. You’ll need the lender’s approval with this option.
Land contract — With a land contract, title isn’t conveyed to the buyer but she gets what is known as “equitable title,” a shared ownership until the loan is paid in full.
Lease option – This method allows the buyer to lease the home for a specified amount of time. The rent is typically higher than market rents and there is an upfront fee, akin to a security deposit, except the buyer will forfeit it should he decide not to purchase the home at the end of the lease.
The terms of a lease option are negotiable. This generally includes the length of lease, what portion of the rent is credited toward the purchase and the purchase price. For this reason, there is no standard lease option but numerous varieties.
The all-inclusive mortgage and junior mortgage are two other popular methods of providing seller financing. Ask your real estate attorney for details on these options.
Seller financing can be complicated for those not familiar with it. It is important that both the buyer and the seller obtain the services of a real estate agent.
Don’t hesitate to call us or your real estate attorney with any questions about seller financing.