|
Owner
Financing
|
It's rare that you'll
be able to buy a house which the seller will
finance for you. If that explanation satisfies you,
then you can skip
this section and go on to the next
one. If you
happen to find an owner-financing opportunity, you
can always return to this page later. There's a lot
to know about buying a house and spending time
learning things that don't apply to you may only
confuse and overwhelm you, and distract you from
the things you do need to know.
Next topic: Qualifying
for a loan
Owner
Financing
(aka
"Seller Financing")
You might be thinking, "Hey, could I just
make payments directly to the seller instead of
getting a mortgage? Then I wouldn't have to qualify
for the mortgage." That indeed could be a good
deal, except that owner-financed deals like this
are rare. Here's why.
The seller has to pay off their existing
mortgage before they can sell.
Let's say the seller is selling the
house for $150,000 house, and they've got
$110,000 left on the mortgage. If they sell it
the regular way, where you get your own loan
from a bank, then $110,000 of the your new
mortgage will pay off the seller's old mortgage,
and the seller will wind up with $40,000 in
cash.
But if the seller wants to owner-finance to
you, then s/he'll have to pay off the existing
mortgage first. Does the seller have a spare
$110,000 lying around? Probably not. So in most
cases, sellers can't owner-finance to you
even if they wanted to, because they don't have
the means to pay off their existing
mortgage.
The seller wants all their cash up
front.
With a regular sale, the seller gets
all the cash up front. When they owner-finance,
the money  trickles
in, month by month, for 30 years. So most
sellers prefer a regular sale so they can get
all their money up front. After all, what's the
most common reason people sell a house? So they
can buy another one. And they'll likely need the
money from the sale of the old house to use as a
down payment on the new house, or to fix it up,
or both.
Another reason the seller might not want to
owner-finance is that they don't expect to live
another 30 years in order to collect all the
payments. This is especially true if the seller
is over 40.
So you see, sellers usually either can't
seller-finance, or they don't want to. That's why
you'll rarely find houses that are
owner-financed.
Of course there are exceptions. Here are
cases when owner-financing is a possibility.
- Financing as an investment. If the
seller doesn't need all the proceeds from the
sale right away, then owner-financing a home can
be a great investment. When you put money in the
stock market, you might get 6%, or maybe a
little more -- or you could lose 5, 10,
or 20%, or all of it. By contrast,
owner-financing gives the seller a guaranteed
return of whatever the interest rate on the
loan is. Further, sellers who owner-finance can
charge a higher interest rate than banks because
seller-financing often makes the deal attractive
to the buyer, especially if the buyer couldn't
qualify for a bank loan. The main risk to the
seller is that the buyer will fail to make the
monthly payments (known as "defaulting" on the
loan), but in that case the seller can reclaim
the house ("foreclose" on it) and sell it to get
their money back. The seller is fine as long as
they can sell the house for at least as much as
is left on the loan.
- You offer a higher interest rate. One
way you might be able to convince an owner to
seller-finance is to offer to pay a higher
interest rate. Of course, you wouldn't make such
an offer if you're able to qualify for a bank
loan, but if you can't get a bank loan,
then offering a higher rate directly to the
seller might be what it takes to get you into
the home you want. Also, once you've had the
home for a year or two and your financial
situation improves you might be able to move
that loan to a bank.
- The seller finances only part of
the loan. Once I wanted to buy a home but I
couldn't come up with the last $36,000. (I had
no more cash left and couldn't get a bigger
loan.) But I really wanted the house. So I asked
the owner to owner-finance just that small part
of the cost of the house, and I offered him
twice the prevailing interest rate. He accepted.
A year later I was able to easily move that loan
to a bank at half the interest rate, so I only
had to pay the higher interest for one year.
|
|
|
|
