Owner financing is pretty much what it sounds like - when part or all of a home's purchase price (less the buyer's down payment) is carried by the seller. The buyer and seller agree on the loan amount and terms, interest rate, monthly payment, and the buyer then pays the seller for the seller's equity on an installment basis. To protect both parties, the papers are generally drawn up by an attorney and the financing instrument is recorded in public records. The primary risk to the seller is that the buyer will default, which is to fail to make required payments. In that case, the seller can foreclose on and reclaim the house and sell it to recover their money. Owner financing becomes common in a buyers market.
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Owner Financing Benefit to Buyers
There are many benefits of owner financing to home buyers. First, the qualifying process is generally easier and criteria for approval can be less stringent. This is especially important for buyers who may not be able to get a bank loan but want to build equity in home (a.k.a. real estate investment). It can help build the financial situation necessary to eventually be able to move the loan and finance through a bank. Owner financing allows for financing flexibility - the terms can be tailored to fit the needs of the buyer and seller's specific situation. Down payments can also be negotiable, allowing for flexibility in how and when lump sum payments take place throughout the life of the loan. Generally a down payment needs to be at least 10% so the seller's closing costs are covered but in most cases, sellers require 20% to 30% down. Sellers feel confident their equity is safeguarded by the buyer's down payment because buyers are less likely to foreclose if they've invested money up front. Another advantage is closing costs are reduced because many routine lender fees such as loan/discount points, origination fees, processing fees, administration fees, and any of the other assorted miscellaneous fees can be avoided. Finally, another advantage to buyers is they can take possession of the home in a much shorter time frame because they aren't waiting on a lender to process the financing.
Owner Financing Benefit to Sellers
There are also a multitude of benefits to a seller with owner financing. Because of the benefit of the offering owner financing, many times the seller is in a position to command full (or close to) list price. The seller has also created a situation to generate an increased monthly cash flow at an interest rate that is quite competitive compared to other low-risk investments in the current economic climate. When compared to high-risk investments, owner financing gives the seller a guaranteed return of the interest rate, rather than a risk of total loss like what can happen in the stock market. The seller may also be able to reduce required tax payments on an installment sale, reporting only the income received by calendar year. Additionally, owner financing differentiates a listing from the majority - it is a way to stand out and not have your home listed for a long period of time. Educated buyers seem to always keep their eye out for owner financing opportunities.
All in all, owner financing can be a win-win situation for the right buyers and sellers.
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