How Does Owner Financing Work?
In the majority of real estate transactions, properties are acquired or sold using cash or bank financing. If a buyer can’t afford to purchase a property outright, they will undergo various underwriting procedures to see if they qualify for a loan.
Many people haven’t heard of owner finance homes and have no idea that there’s an alternative option for buying and selling homes. So today, we’re going to answer the following questions:
- What is owner financing?
- What is seller financing?
- What do owner financing contracts entail?
- What are seller financing homes?
First, let’s break down and define owner financing:
What Does Owner Financing Mean?
Otherwise referred to as ‘seller financing’, owner financing is a kind of transaction where a property’s seller finances the purchase with the person or entity buying it. Owner finance homes help sellers sell faster and help buyers secure homes, even if they fail to meet traditional mortgage criteria.
Also known as ‘seller carryback’ and ‘seller carryback financing’ (because the owner ‘carries back’ the financing), this process is similar to bank financing. However, the buyer repays the seller in monthly installments as opposed to the bank. Additionally, both buyer and seller agree on a specified interest rate and terms before owner financing commences.
Seller financing is popular among investors who buy and sell properties, but it can be orchestrated by anyone interested in real estate and finance. Although this financing method is less common than bank loans, it’s a lucrative option and is more common than you may think.
There are no restrictions concerning owner finance homes, with properties ranging from self-storage facilities to fourplexes being sold using this type of financing.
Owner financing is ideal for people who fail to qualify for traditional financing due to their employment, previous foreclosures or bankruptcies, or economic factors that make lending guidelines more stringent.
Check out this free owner financing calculator.
Types of Owner Financing
When there are houses for sale via owner financing, lenders typically have several options from which to choose:
Seller-Held Financing
In a lending environment where money is tight, sellers can decide to provide financing to potential homebuyers. Usually, the seller sets out loan terms, annual interest rates, and a purchase price.
Buyers have the option to accept these terms or present a counteroffer. However, if a seller has received little interest in their property, buyers may negotiate more favorable interest rates or lower purchase prices. Seller-held financing options can provide short or long-term payment plans.
Junior Mortgage
Junior mortgages can be issued to make up the amount of a buyer’s primary loan. In this process, a seller could hold a second mortgage that provides the difference between your first mortgage and the property purchase price.
For instance, if your bank offers you 80% towards a home that costs $100,000, your mortgage loan would be $80,000. In this case, an owner-financed junior mortgage can be combined with your down payment to clear the $20,000 balance.
Lease-Purchase Option
Lease-purchase options work as written agreements for the purchase of a property between the buyer and the seller.
For example, if a buyer requires more time to save money for a down payment or to repair their credit, the owner may help them by offering a lease-purchase option. Typically, a lease-purchase option displays the deposit amount, purchase price, required monthly payment, and any additional terms in the agreement.
Lease options tend to be structured to credit part of the buyer’s monthly payment and the deposits toward closing costs or settlements. In typical circumstances, a buyer will forfeit their deposit and all other credits if the option to buy the property expires short of the allotted time frame.