There are several ways to obtain a home loan either through a bank, credit union, or mortgage broker but there are also alternative options for those with less than perfect credit or have had issues getting financing through a traditional route. An alternative form of financing is considered owner or seller financing or owner carryback.
Owner financing means that the properties owner/seller participates in financing the buyer's purchase of the property either partially or the entire loan itself. The owner acts as the bank and sets up interest rates, payment plans, and payoff amounts.
This type of financing becomes more prevalent when sales in a particular area slow down and sellers are motivated enough to try just about every avenue. If the seller doesn't need the full cash upfront, let's say, to buy another house, owner financing might be a great option for buyers. It could be a good incentive as owner financing might be a little more lenient than bank financing but the owner still has to take the risk just like a typical lender.
It's important to have a real estate attorney draw up the proper paperwork. This is one of the biggest issues that many owner financing situations may have. It's important to draw up all of the paperwork legally and have it notarized and signed. This protects both the buyer and the seller.
Using owner financing is not necessarily less expensive, however. Interest rates may be higher and there are real estate attorney fees as well as real estate commissions to think about. But owner financing is a great option for borrowers that may not meet certain criteria for traditional lending.
Drawbacks to this type of financing could include the seller still owning the property while the current buyer is paying off the mortgage. "A typical problem for the buyer is if the seller does not own the property being sold free and clear of any mortgage or trust deed and the buyer cannot get a loan to pay off the existing loan, the buyer runs the risk of obtaining a loan from the seller and taking title subject to the existing loan in place." [source]
Seller problems can arise when the buyer can only qualify for a loan up to a certain dollar amount and this loan needs to be in the first secured position to be sold. The seller may agree to loan the buyer the balance of the home sales price by a promissory note secured by a second mortgage on the home. If the seller is in the second secured position and the buyer defaults on the first loan, the seller must keep the first loan current if they have their own mortgage on the property.
The most common problem arises from owner financing when the seller's loan becomes due for payment. Buyers could make claims that there are problems with the home not originally disclosed and back out on the loan at the last moment.
Owner financing can be a great option but there are a lot of caveats and things to consider before agreeing to owner financing. It's not necessarily a bad idea and for certain situations, it can be a great option for both buyer and seller. But, before agreeing to any owner financing it's important to discuss the terms and options with a real estate attorney.
For more information or referrals to a real estate attorney contact our office today.