What’s Next If You Don’t Qualify For A Traditional Loan?

Your credit history is an important aspect in qualifying for a loan. With a poor credit history, being approved for a conventional bank loan can be difficult. While you are addressing the issue, you will need to pursue other financing options.

Owner financing is undeniably one of the most efficient means of funding. It allows you to acquire properties with ease and avoid the stringent regulations and hurdles associated with traditional financing.

Seller Financed Homes | Owner Will Carry

Seller financing is an agreement where a buyer finances the purchase of property through a loan provided by the seller.

How does it Work?

In seller financing, the seller takes on the role of the lender. This option is great for a buyer who is unable to get a traditional loan from a bank. Generally, the property being purchased has a paid-off mortgage. If the buyer’s down payment will pay off the seller’s mortgage, this is also a possible situation. If the seller has an existing mortgage, the bank must be informed.

• Typically, the seller extends enough credit for the price of the home excluding any down payment.

• The two parties then sign a promissory note that states the terms of credit.

• They are then required to sign a mortgage or “deed trust” depending on which state the agreement is undertaken.

• The buyer is expected to pay back the loan plus the interest within the stipulated period.

If a seller has a junior loan, the buyer may take the title (after clear title search) subject to obtaining a first mortgage or the existing loan. The buyer is given the deed; she then issues the seller with a second mortgage for the difference in the purchase price after deducting the down payment and the first mortgage amount.

*However, it’s good to note that Owner Will Carry loans are typically short term.

That’s because sellers, unlike financial institutions, may not be patient to wait for twenty years or more for the loan to be repaid in full. However, they may be amortized over the 20 years if there is a balloon payment at the end. This is especially possible if the property is projected to gain value over time or the buyer is in a position to get lending from traditional lenders to refinance the purchase.

Types of Financing - Below are some of the various types of contracts:

• Lease Purchase Agreements – Buying a house on lease purchase means that the buyer is given equitable title through the lease. Upon fulfillment of the agreement, where buyer agrees and seller agrees to terms, the buyer is issued with a title and can source for a loan to pay off the seller.

• Land contracts– The buyer receives an equitable title, a temporarily shared ownership, and is expected to make payments to the seller for a particular period. Once the final payment is made or the buyer gets a refinance, the seller is then required to transfer the deed. 

• Mortgages and promissory notes – A seller may decide to carry a mortgage for the balance of the purchase price. In some cases, this may include an underlying mortgage price that will be less than the down payment paid. Such a mortgage is referred to as an “all-inclusive mortgage” for which the seller is granted an override on the interest of the underlying loan.

Who Is it For - The two most common reasons for owner financing include:

• Mortgage accessibility - With owner will carry or seller financing, mortgages are easy to access even for buyers who may have a bad credit report. That’s because sellers are beginning to embrace the idea that many qualified buyers are facing challenges in securing conventional loans even though they can make the monthly payment.

• An alternative option - Getting conventional loans from financial institutions can be challenging, and hence home buying becomes difficult. Cognizant of that fact, home sellers need to seek alternative options. Although it’s not common among sellers (approximately less than 10% support the idea) it becomes a necessity during such times.

Pros -Owner financing affords the following:

Buyer

• Faster Closing - Prudent sellers and buyers always use the closing period to conduct due diligence. However, with owner financing, the closing process is much quicker since there is no banker required to make any approvals, there is no legal department required to clear a file, or an underwriter.

• Tailored Financing- Unlike traditional loans, owner financed options allow the buyer and seller to settle on a variety of options such as fixed-rate amortization, interest only, balloon payment, or less-than interest rate. The payments can also be combined depending on the agreement of the parties and interest rates adjusted over time or remain the same for the entire term of the loan.

• Flexible Down Payment - The two parties can negotiate the down payment. In instances where the seller wants a large down payment that a buyer can’t afford at the time, the two can agree on periodic lump-sum payments to realize the target down payment in order to pay the seller.

• Minimum qualifications needed - The seller’s requirements are way less stringent than financial institutions. Even if the seller reviews the buyer’s credit report, they will only be evaluating the buyer’s ability to repay to fully buy a home.

• No loan costs - Conventional loans come with associated costs, including origination fees, points, underwriting charges, credit reports, appraisals, title insurance and more… With owner financing, the buyer is free from all these expenses.

Seller

• Sell on “as-is” basis - The seller who is offering owner financing may have the option to transact without spending large sums on costly repairs based on the negotiations with the buyer. In some scenarios, the seller may agree to subtract the cost of repairs on the purchase price as an incentive to the buyer.

• Retain title - With owner financing transactions, the seller only makes the transfer when full payment has been made. In case a buyer defaults payment and the conflict cannot be resolved amicably, the seller will retain all payment made by the buyer as well as title to the property.

• Good investment - The seller has potential to earn higher interest rates from the money they raise from the sale than they would from investing it in other businesses.

Cons - Owner financing may have the following pitfalls when doing a contract for deed with seller financing.

Buyer

• High-interest rate - The buyer is likely to pay a higher interest rate than they would pay to a conventional financial institution.

• “Due on sale” clause - Should the seller be having a mortgage on the house, the bank might demand full payment of the outstanding amount when the house is sold.

Seller

• Repair cost - If you need to repossess the house for whatever reason, you will have to compensate the buyer for any maintenance and repair costs.

• Default - Should the buyer default on payments, the seller is forced to initiate the foreclosure process.

Bottom Line

While there are numerous ways you can sell or buy a home, owner financing bears some legal, logistical, and financial considerations for both the buyer and seller. It comes with abundant aspects that are beneficial to everyone.