As a real estate buyer, you have several options for financing a purchase. A conventional loan with a traditional mortgage lender is one option. Another option is a government-backed loan such as an FHA or VA mortgage. A third choice, in which the property owner finances the transaction, is sometimes called an "owner-carry" deal.
When the owner of a property finances the transaction, a commercial lender is not involved. If you finance a real estate purchase through a mortgage lender, your lender pays the seller, and you repay your lender by making monthly mortgage payments. However, with an owner-carry transaction, you pay the purchase price for the property directly to the owner, and no third-party bank or lender is involved. You and the seller agree on the purchase price, the down payment and other terms of the transaction.
The terms of an owner-financed real estate deal are often more flexible than the terms of a conventional loan. Commercial lenders have to follow credit requirements for borrowers and appraisal requirements for the property before they lend money. In contrast, a property seller can decide for herself what credit requirements she looks for in a buyer. Buyer and seller can agree about how much the property is worth without hiring an appraiser, and they can set up any payment schedule that works for them.
One downside of owner-carried real estate is that these deals can be hard to find. Typically, the seller owns the property outright and doesn't need the proceeds from a buyer's loan to buy another house. Only 30 percent of sellers meet this criteria. Sellers are more willing to finance at times when the interest they can get from a buyer yields more than they can make on other investments. Another downside to an owner-financed transaction is that your credit report won't reflect your payment history. If building your credit is important to you, you may want to get a home loan through a lender. Also, because transaction terms are so flexible, you may sign up for monthly payments you can't afford, or a big balloon payment you can't make in the future.
As a buyer, you can take steps to protect yourself in an owner-carry transaction. Hiring an experienced real estate attorney to review the loan documents and conducting a title search to make sure the seller really owns the property outright are smart moves to make before you sign for a loan. Review your budget carefully to be sure you can comfortably make your loan payments. After the sale closes, pay your loan payments on time to eliminate the risk of default or foreclosure.
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