Qualifying for a traditional mortgage is not an easy thing. Going with owner financing allows you to bypass the strict lender requirements. Sounds good, right?
Well, it is. But there are some things you should consider before going that route, because it may not always be just roses. In fact, owner financing comes with a few disadvantages of its own, too.
The last thing you want is to make an uninformed decision about buying a new home. It's your job to stay informed so you can make the right choice.
This article will help you do just that. In it, we'll take a look at the advantages and disadvantages of owner financing. Let's dive in!
What Is Owner Financing?
First, let's cover a few questions. What is owner financing? How does owner financing work?
Owner financing is the process of selling your home without a middleman. Yes, that's right-- removing the banks and other people that typically get a cut from the home selling process altogether.
Instead of using other people, you finance the transaction yourself. While traditional people like lenders and real estate agents are not included in the process, owner financing sets you up for both pros and cons as you look to move the property.
Advantages for Buyers
If you're looking to buy a home, owner or seller financing come with plenty of perks. For example, you can close the deal much faster. With this type of financing, you don't have to wait for a bank loan officer to approve the deal or the legal department to process your application.
It's also much cheaper to go this route. There are no bank fees or appraisal costs. Plus, you have more flexibility in terms of how much goes down for the downpayment, meaning you don't have to deal with any pesky minimums.
Finally, if you struggle with credit, it may not be realistic for you to get a good financing deal with a typical mortgage set-up. In this scenario, owner financing can benefit someone by opening up doors to home ownership that wouldn't have been there otherwise.
Disadvantages for Buyers
All of those things sound nice, right? Well, they are. But keep in mind that there will be some other disadvantages as well.
For example, your interest rate will likely be higher. And because you aren't dealing with a bank, you could be at the disposal of the seller giving you approval for it.
Also, something to consider is the Due On Sale clause. This means that if the seller has a mortgage on the property you're buying, their bank may immediately demand you to pay the debt in full. This helps protect the bank, but it can create hurdles for potential buyers to jump over.
Advantages for Sellers
It's not just the buyer that has advantages. As we answer "How does owner financing work", let's shift gears towards the home seller.
One advantage is that owner financing can help you stand out. Especially in a crowded housing market or in a situation where you're struggling to sell your property, this can be an advantage that attracts people to your home over similarly priced options in the area.
There is the added advantage in owner financing of selling your home "as-is" and not having to deal with the extra work that comes with readying a house during the traditional process. Most real estate agents will want to present the house perfectly, but if you are opting to go without them, you truly have final say (and your price points can reflect the work that needs to be done).
Finally, if the buyer of the home stops making payments, you can get the house back and keep the down payment they made, plus any money they paid on top of it. This is obviously a worst-case scenario, but it's good to know that things will work out in the seller's favor if something does go wrong.
Disadvantages for Sellers
Like with buying, there are a few hoops to jump through. Here are a few things to consider:
Typically, you need to own the home to set up an owner finance situation. If your mortgage isn't paid off, you must get approval from the lender before the deal can come to fruition.
Hopefully, this would never happen, but if the buyer stops making payments, you would need to go through the foreclosure process. This can be a difficult process involving plenty of people, which is what you're trying to avoid in the first place by going through owner financing.
Finally, if you were to reclaim the house for any reason, you would likely incur the repair costs of any damages made to the house. After all, the person that was living there that was foreclosed on is probably not coming back any time soon to clean up or fix things.
Is owner financing safe? Is it worth it? You'll have to decide for yourself. There are obvious advantages and disadvantages in all scenarios.
Owner Financing- Wrap-Up
While there are many benefits to owner financing, there are certainly some hoops to jump through if you choose to do the whole process on your own.
As for advantages, the seller and the buyer have more autonomy and flexibility to sell or buy the home on their own terms, cutting out the fees and hassles associated with the traditional people involved in the home buying process.
As for disadvantages, you lose the security and delegation that some of these middlemen and support systems (like real estate agents) bring to the table. You also likely have to educate yourself on things like taxes and legal ramifications if the person doesn't make payments.
Contact us with questions about owner financing and we'll be in touch!