If you have tried to get a loan from the bank in the last five years, then you know how strict their requirements can be. Without perfect credit and verifiable income from a steady job, you may find yourself unable to qualify for a bank loan.
This is why more property buyers are turning to owner financing. With this form of financing, the terms of the sale are negotiated between the buyer and the seller. The two parties create a written promise, which states that the buyer will make the monthly mortgage payment to the seller. This promise is secured by a lien and is a legally binding contract. It functions just like a bank mortgage, expect the seller acts as the bank.
As a buyer, there are several advantages to owner financing:
You can purchase a home without bank financing. This gives you flexible loan terms and credit requirements. If you are self-employed or trying to purchase a unique property, this could be a great option for you. You can still enjoy the benefits of owning property even after the bank has turned you down.
You will pay fewer closing costs. The expensive costs you would have used for origination and underwriting, mortgage insurance premiums, appraisal, and other fees will be significantly decreased with an owner financed sale, saving you thousands of dollars.
You can improve your credit. Making timely payments on any loan will help build your credit. If you were turned down for a bank loan because of a low credit score, owner financing could help you improve your score, which is a much better option than a high-interest rate loan.
Your loan will close faster. Dealing with a bank takes time. They require thorough due diligence on the buyer and the property, which could take months to complete. By removing the bank and dealing directly with the property seller, your loan will close faster.
If this seems like the right way for you to go, here are a few important things to consider:
The size of your down payment. You might be able to negotiate better terms for the sale if you provide a sizable down payment. By putting down 20-30%, you lower the risk of default and could secure an even lower interest rate for yourself.
The condition of your credit. Although your credit may not be the deciding factor, it can play a part in helping you get a lower interest rate. Review your credit report and be ready to explain any entries.
Your ability to make the monthly payment. Since you will be making your monthly mortgage payment directly to the seller, they need to know that you will pay on time. You need to have consistent income, whether its from a job, your business, or investments. The seller will want to know your debt to income ratio, which will preferably be less than 35%.
Not only are there benefits for you as a buyer, but there are also benefits for the seller. Owner financing can attract a larger pool of potential buyers, and properties typically sell faster than those only offering bank financing.
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