WHAT IS OWNER FINANCING?

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We’ve talked before about the benefits of owner financing from both the perspectives of a buyer and seller – but maybe you still want to know what exactly owner financing is – and what it entails.

Owner financing put simply is a tool that can be used to purchase real estate when you can’t, or don’t want, to use a traditional mortgage or go through a real estate agent. Owner financing goes by many names including seller financing, owner carried financing, owner carryback or owner will carry. They all mean the same thing – the seller has agreed to accept installment payments directly from the buyer. Owner financing can be used by anyone and can be used to purchase any type of property – a single-family home, apartment building, or raw land.

When it comes to owner financing, there are some terms you will want to know and understand:
  • ·        DOWN PAYMENT – It is very unlikely that you will be able to work out an owner finance deal without a down payment. This is the sellers’ reassurance that the buyer has some skin in the game – making it less likely for the buyer to default as they would lose that investment. The down payment is typically anywhere from 5% to 25% of the purchase price.
  • ·        LOAN AMORTIZATION – This is the time negotiated for the purchase to be paid off. Although most mortgages have a 30-year amortization schedule, owner finance options may be shorter (15 – 20 years,) as many owners won’t want to wait 3 decades for the property to be paid off. Another option sellers may opt for to conclude the sale is a balloon payment.
  • ·        BALLOON PAYMENT – With a balloon payment, the seller will negotiate a time with the buyer in which the remaining principle balance of the loan is due. For example, they may agree to a 30-year loan amortization schedule – but require the remaining principle balance be due after 15 years. The buyer can pay cash at that time or, more commonly, acquire a new more traditional loan. This allows the buyer time to work down the loan amount needed, as well as work to correct their credit so a traditional loan is more obtainable.
  • ·        PROMISSORY NOTES, MORTGAGES OR DEEDS OF TRUST – This is the buyers promise to pay off the debt to the owner. It includes the following information:

-         Amount of debt
-         Repayment terms
-         Interest rate
-         Repayment schedule
-         Payment amount
-         If a balloon payment is involved
-         Penalties for late payments
-         If early payment involves additional costs
Which type of document is used is based primarily on what is customarily used in the area that the property is being sold in and in most cases will be drawn up by a lawyer and filed in the local courthouse.

Keep in mind that owner financing is still an option, even if there is an existing mortgage on the property. Although mortgages cannot be transferred to the buyer from the seller, there are other options that can be used to satisfy the current mortgage and still sell through owner finance - so regardless of if you are interested is selling though owner finance to keep a little cash flow coming in or buying without going the traditional route and obtaining a mortgage – WE CAN HELP! Let us be your Real Estate SOULution and contact us today!

For Louisiana: www.ibuylouisianahomes.com 225-800-4445

For Texas: www.yoursouldtexas.com/houston 832-956-0444

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