Pros and Cons of Owner Financing

Buy a house

While the most common form of financing is the mortgage loan, there are other alternatives to consider. One such form is the owner financing. It had advantages as well as disadvantages for both the sellers and the buyers.

What is Owner Financing?

Usually, a home is a single large investment for most individuals. Some type of financing is involved due to high costs. Owner financing refers to the type of financing made by the buyer while directly purchasing from the seller. It is dissimilar to a lender or bank providing the conventional mortgage. Also termed as the seller financing, it involves the extension of credit to the buyer, by the seller. The buyer makes regular payments, after the down payment, until the entire cost of the home is paid. For the purpose, both parties sign a promissory note mentioning the terms of the loan, the repayment schedule, the interest rate as well as the consequences of any default. At times, the owner keeps the title to the home until full repayment is done by the buyer. This is generally a short term agreement.

Advantages of Owner Financing

For the Buyer

  • The deal closes faster
  • This does not include any appraisal costs and is hence, cheaper
  • The down payment is flexible as the agreement is not governed by regulatory minimum amounts
  • It is generally a decent option in case you are unable to secure a mortgage

For the Seller

  • Traditional lenders may ask for costly repairs, which can be fixed
  • There are better rates on the money that would otherwise be invested in other ways
  • A seller can receive a lump sum payment by selling the promissory note to an investor
  • Retention of the title of the house is possible until full payment
  • Faster selling as the mortgage process is not included

For any queries, you must consult a qualified real estate attorney.

Disadvantages of Owner Financing

Logistical, legal and financial disadvantages are involved with owner financing.

For the Buyer

  • The interest rates may be higher as they depend on the discretion of the seller and your own negotiation ability
  • It requires the approval of the seller as well
  • The Due in Sale clause – The lender or bank may demand full repayment if the seller has a mortgage on the property
  • Balloon Payments – After five years, a large balloon payment becomes due in case of numerous owner financing agreements

For the Seller

  • New rules and acts
  • Default check is difficult
  • The repair cost may need to be borne if the property is taken back

About Jennifer Cribsly

I'm a former real estate broker who specialized in helping first time buyers be able to purchase a home. Now full time mom, part time real estate owner/investor.
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