When it comes to selling houses, people are becoming more open towards alternative ways of financing. Is it a good idea to opt for owner financing?
Most real estate transactions still follow a traditional process. The buyer, with a good income, stable employment history, and good credit score, qualifies for a mortgage, and then the lending institution borrows them the money needed for a house sale.
However, not all can qualify for a mortgage, and if the buyer doesn’t have all the assets the bank requires the sale might fall through. This doesn’t mean that you can’t continue with the sale privately. The seller and buyer can agree to have what is known as owner financing.
But is owner financing safe? How can you be certain everything will go well? Here is all you have to know about this type of financial agreement.
What Is Owner Financing?
When you agree upon seller financing, the buyer and the seller agree to make all the payment arrangements alone, without a bank. As the name implies, in this occasion, seller is the lender. Two parties create a promissory note that states the interest rate, payment schedule, as well as what will the consequences be in case the buyer fails to make the payments on time.
Unlike a sale that involves a mortgage, there is no transfer of the principal. Instead, there is only an agreement that the borrowed sum will have to be repaid over time.
Benefits of Owner Financing
There are several benefits of such a financing for both buyers and sellers in Milwaukee.
First off, most of the times it enables buyer to get into a home faster. Owner financing can be rather useful if a buyer has received some sort of damage to their credit score, which means they can’t get the mortgage loan. With seller financing, the owner doesn’t have to require for a clean credit score or high monthly payments, which will allow buyer to purchase a house even when the bank isn’t supporting them.
Second, it provides flexibility to both the buyer and the seller. A bank uses fairly traditional terms: You’ll pay so much money as a down payment, then the rest paid back over time – either as a fixed rate or variable rate mortgage. But a seller and a buyer may find different terms that they agree to that aren’t as rigid. In fact, some agreements can become very creative and flexible for both parties!
Third, it can be a win the seller, too. A seller wants to sell their home, so offering this type of financing gives them access to more buyers who might not typically be able to buy. By offering seller financing, they increase the number of potential buyers who would even look at the house. And not all sellers necessarily require all the cash up-front (which why would get through bank financing). Instead, they may prefer the cash flow that owner financing gives them.
Disadvantages of Owner Financing
However, this method isn’t without its flaws. Many sellers won’t agree upon this option, so it is fairly rare – but luckily, we at Sparks Property Investors LLC commonly do it, so feel free to contact us by filling up this form.
Owner financing comes with many more flexible terms than you might normally get at a bank. However, this can also be a disadvantage because if you are not familiar with the all the possibilities you may overlook a term or you may create a term that does not give you an advantage.
With traditional bank financing, the interest rate is set by the bank. This type of financing may have higher interest rates (depending on the other terms of the contract) and you might end up paying more for the house. However, you might be fine paying more overall if it means you can get into a house that you couldn’t otherwise get into.
When you go with bank financing, you work with a bank which means you work with professionals who are bound by a code of conduct and industry regulations. When you choose owner financing, everything is based on the agreement, so you have to make sure that you have trust in the owner before you make an agreement with them.