What is Owner Financing?
Owner financing or seller financing, is as the name implies, the owner finance the deal, meaning the own is now also the bank. Instead of the buyer getting a loan from the bank, and paying monthly payment to the bank, the buyer will pay the owner a monthly payment.
Owners usually offer owner-financing to make their properties easier to sell because the seller now has a larger pool of buyers, who are unable to obtain mortgage from banks. Sellers may finance part of the purchase price - 30% or 50%. Sometimes they may even finance up to 100%.
A typical owner-financing deal looks something like this. The owner or seller has a property that he/she wants to sell for $500,000. With more stringent bank requirement, mortgage loans are hard to come by. So the seller offers owner financing to less qualified buyers. The seller finance 50% of purchase with a small down payment, which means the buyer only has to come up with the other 50% from the bank. So instead of coming with $100,000 down payment (20% of the purchase price) and getting a $400,000 conventional loan, the owner may only require a $10,000 down payment, and owner-finance the $250,000. The buyer now would need only to borrow $240,000 from the bank for this purchase.
Seller financing are usually short-terms 3-5 years long, at which time the buyer, hopefully with better income and credit score, would be able to re-finance with the bank. Most seller financing charges higher interest rates, something around 5-6% now, for 3-5 years, then balloon payment at the end of term.
Why is Seller Financing a Win-Win Strategy for Both the Sellers and Buyers?
The benefit for the seller is that he/she would earn the interest that would normally goes to the mortgage bank. The seller is acting as the bank and the money he/she is lending is secured with the property, which means if the buyer default or is not able to refinance at the end of the financing term, the property goes back to the seller.
The benefit for the buyer is that he/she can buy the property now, instead of waiting to save up enough down payment or repair their credit score, or whatever their reasons for not getting a mortgage from the bank.
Hopefully at the end of the owner-financing term, the property would have increased in value or equity either through appreciation and/or consistent monthly payment. Now with more equity in the property, the buyer should be able to refinance to a conventional mortgage easily.
Isn't it brilliant?