How Does Owner Financing Work?





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Published on Mar 5, 2012

How does owner financing work? http://www.reimaverick.com/how-does-o...

Owner financing is becoming increasing popular in today's economy due to how difficult obtaining a conventional mortgage has become. In order to qualify for most conventional mortgages, a person must have a certain credit score, must have employment for a certain number of years, and must be able to put 20% down on the property.

Also, they must hope that the bank comes up with the same appraisal value of the property that everyone else in the equation does, or the loan will fall apart. The fact is, there are so many things that need to go right in order to obtain a loan that many people are turning to an alternative: owner financing. After all, in a free and competitive society, isn't the ability to create new avenues in order to solve problems the backbone of capitalism? With that in mind, let's answer the question 'how does owner financing work?'

How Does Owner Financing Work | Conventional Mortgage

Before we discuss owner financing, let's first explain how a conventional mortgage works. Then we can explain the differences between a conventional mortgage and owner financing.

In a conventional mortgage, a seller agrees to sell a house to a buyer for a price. When the sale is complete, the new buyer obtains a 'deed' to the house. The buyer goes to a bank to obtain a loan for the purchase, using the house as collateral should the buyer ever default on the loan, and the seller is then paid in full at the time of the transaction. This loan is known as a mortgage. The buyer will obtain the deed to the house when the sale occurs along with the mortgage and will typically pay both principal and interest on the mortgage for the next 15-30 years.

How Does Owner Financing Work | What is Owner Financing

In a typical owner financing transaction, a seller agrees to sell a house to a buyer for a price. So what is owner financing? Instead of the buyer seeking financing from a bank, the seller would agree to and create an owner financing contract to sell the house for a price and agree to installment payments in lieu of a full price payoff. So how does owner financing look? Here's an example:

Sales Price: $155,000
Down Payment: $15,000 (includes $5,000 for closing costs)
Note Value: $140,000
Interest Rate: 8%
Balloon: 5 year

Once the terms are agreed upon, the signing of the documents will take place in front of a notary and the paperwork will then be filed at the courthouse. In many instances (though not required -- but highly recommended), owner financing deals will be closed at a Title Company.

How Does Owner Financing Work |Benefits

The benefits of this type of transaction is ease and convenience. First, there are only 2 parties involved- the buyer and the seller. There are no banks, appraisers, insurance companies, underwriters, etc... that turn the mortgage part into a nightmare. Instead, you have two parties that can make offers and renegotiate quickly and efficiently until they both agree. Then they can both close quickly. A typical owner financing transaction can be completed, start to finish, in a matter of days. The seller benefits because installments loans at 8% pay better than putting the money in a bank account and is safer than putting it in the stock market. The buyer benefits because they're obtaining a home they otherwise could not have purchased through conventional methods.

How Does Owner Financing Work | Wrap Around Mortgages

Suppose you are in a situation where you owe $150,000 on a house that is only worth $150,000. If you were to sell with the assistance of a Realtor and wait for a conventional mortgage to be approved, you would typically wait 6 months (6 more months of expenses) and pay 7.5%, or over $10,000 to sell your house. If you are selling because you can't afford to continue making payments and have no money in the bank, then this process doesn't work well. This scenario is too common in today's economy and is a reason for the record amount of foreclosures. What if you could sell your house fast without having to come out of pocket? How does owner financing work in this scenario?


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