Owner financing can be a good option for buyers who don’t qualify for a traditional mortgage. For sellers, owner financing provides a faster way to close because buyers can skip the lengthy mortgage process.
What are the risks of seller financing?
Despite the advantages of seller financing, it can be risky for owners. For one, if the buyer defaults on the loan, the seller might have to face foreclosure. Because mortgages often come with clauses that require payment by a certain time, missing that date could be catastrophic.
Why would a seller offer financing?
Seller financing is championed by some property owners and real estate pros as a way to help home buyers qualify for additional mortgage opportunities, reduce the amount of red tape associated with home sales and improve profit margins on lending.
The Pros and Cons of Seller Financing for Sellers
Pros
Save money. Sellers who make arrangements to provide financing – especially with buyers they know – should save on costs associated with listing and selling a home, as well as on fees. They can get a continuing stream of income through principal and interest payments. And they’re able to spread out some of the financial gain they earn from the sale of the home – depending on how the payments are structured – which can defer or minimize capital gains taxes.
Attract more buyers. In a buyer’s market, offering seller financing might allow a seller to stand out among the competition by attracting buyers who will have trouble securing a loan.
Cons
Possible foreclosure. If the buyer stops making payments and won’t leave the property, you might need to start the foreclosure process, which could take months or even years. You don’t want to be in a situation where you’re not able to get payment under contract of deed for two years while you’re foreclosing.
Is seller financing a good idea?
The answer is entirely dependent on your personal situation and needs. As a home buyer, seller financing may make more lending opportunities available to you, just as it may present an added opportunity for financial benefit to home sellers. However, there are advantages and disadvantages to the practice as well, as outlined above.
Is owner financing safe?
Owner financing is a safe way to finance the purchase of a home as long as the buyers and sellers take precautions to protect their financial interests. Most importantly, the financing terms should be clearly spelled out in a written agreement that’s ideally prepared by a licensed attorney.
And, while seller financing eliminates the need for a lender-mandated appraisal and inspection, buyers should consider taking steps to ensure the purchase price isn’t too high. Likewise, sellers don’t have to run a credit check on a buyer before agreeing to finance the sale. However, it’s a smart way to reduce the risks of owner financing and improve the likelihood of a buyer making on-time payments.
Who pays property taxes on an owner-financed home?
When working with a traditional mortgage lender, property taxes and insurance premiums are often rolled into the monthly mortgage payment. With owner financing, the borrower typically pays taxes directly to the relevant agency and insurance premiums to their insurance company. Importantly, though, buyers and sellers can use the owner-financing agreement to dictate how these payments are handled.