Owner Financing - How Does it Work- By: Dimitri Larno
Ask a seller to give you owner financing to purchase the home he has for sale and most likely you will get a “No.” Sellers for the most part automatically reject the suggestion of owner financing because no one has explained that option to them as a way to sell their home. As a seller, should you consider financing or partly financing your buyer? Owner financing can be a valuable and lucrative tool in a seller’s toolbox, providing he understands exactly what he’s getting into.
Whole or Partial Financing
Sellers can finance the entire balance - or any part thereof - this may or may not include an underlying loan. If there is no underlying loan in place, the seller can finance the entire amount, or the buyer can get a loan from a lending institution for one part while the rest is carried by the seller.
If there is an underlying loan in place, the new loan will be wrapped around the existing one (or the existing loan can also be paid off with a new loan from an institutional lender). For example, a seller has an existing loan in the amount of $60,000.00 and he sells his home with owner financing for $100,000.00. The buyer puts $10,000.00 down and borrows $90,000.00 on a new mortgage, from the seller. This new mortgage will wrap around the existing $60,000.00 loan (hence a wrap-around mortgage).
Benefits to the Seller
The biggest benefit to the seller is that he can command a higher sales price, buyers are generally agreeable to a higher price in exchange for private financing. Other benefits would be 1) tax breaks, 2) potentially higher interest rates, 3) monthly income, 4) shorter marketing time, and 5) because you are willing to get paid in installments you will earn more money in the long run, beyond just the sale price. If you have never looked at an amortization schedule I encourage you do so – you will be amazed, remember that in this case you are the bank!
Benefits to the Buyer
For the buyer, the biggest benefit is simply being able to buy a house rather than not being able to. The reason for this is that the seller will have different, and hopefully, less stringent qualifying criteria than an institution. Some other benefits are 1) lower closing cost: buyers will not have to pay origination fees or loan discount fees, 2) faster move-in time, financial institutions will have a longer qualifying and underwriting process than an individual seller, 3) Flexible financing term: within the guidelines of applicable usury laws, buyer and seller are only limited by their imagination, as long as they both agree, they can pretty much do whatever they want.
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