When people are in the market looking for a house, getting the right one is not the only struggle they face. They also face the trouble of getting pre-approved for mortgages.
Owner financing is the next best option, but it can also be complex and needs a written agreement. Therefore, homebuyers need to know everything involved before deciding whether it’s the best option.
What Is Owner Financing?
Also known as seller financing, this financing option allows the home seller to finance the home, partially or fully. The home sellers benefit from financing through interest, which is often higher than current mortgages, and a balloon payment after around five years.
The buyer and seller agree on the interest rate, repayment period, amount, and schedule, plus other loan details. After that, the buyer gives the seller a promissory note showing that they agree to the terms.
How Does It Work?
Like traditional mortgages, owner financing requires the buyer to put down a down payment and then pay the rest in monthly installments. Owner financing is usually easier and faster to get than traditional mortgages if the seller is able and willing to finance the property.
While some sellers require a background check to determine the buyer’s credit score and history, it is not as complicated as traditional mortgages. This gives even buyers with lower credit scores a chance to own a home.
It is usually advantageous for the seller and the buyer because the buyer does not have to go through the lengthy loan application and pre-approval process. It also simplifies the closing process and reduces the closing cost because there are no inspection and appraisal costs unless the buyer wants an inspection and appraisal.
Depending on the loan term and repayment terms, the buyer might have to pay a large sum of money at the end of their loan period. However, unlike conventional mortgages, the buyer has to make the insurance and tax payments directly instead of rolling them into their monthly payment.
When the loan period ends, the buyer makes a balloon payment or takes a mortgage refinance and uses the money to pay off the seller.
Depending on the loan structure, the buyer gets the title to the property after paying the total amount. The seller might also execute a satisfaction of mortgage to show that the buyer paid the mortgage in full and released the lien on the home.
How to Apply For Owner Financing
Promissory note
This is the most popular method to get owner financing. The buyer and seller use a promissory note that indicates the loan amount, amortization schedule\ period, and interest rate. The house usually collateralizes the mortgage, and the buyer’s name goes on the property’s title plus local government records.
Contract for deed
Also known as the land contract or installment sale, this is when a buyer does not get full ownership of the property’s deed until they finish repayments. However, they get the deed if they refinance the loan and pay the seller’s total amount.
Lease-purchase agreement
Also called rent-to-own, this agreement involves the seller leasing the property to a buyer, who may then buy it for a particular amount. During the lease period, the buyer pays rent but can decide to give up their lease agreement or purchase the property after it’s over.
If they decide to purchase the property, the seller applies the rent they paid during their lease period to the buying price.
Because of the complexity of the process, experts at Lantern by SoFi recommend buyers work with licensed lawyers to help them get the best deals when signing the paperwork. Buyers should think about how to apply for a small business loan to learn how to get the best home loan.
