You've found your perfect home and the owner has offered to finance your purchase if you put some money down. Before accepting the offer, it's a good idea to survey the mortgage market to compare the owner-financed terms with other residential loans. It's also more than a good idea to hire an attorney with lending experience to carefully review your private loan documents before signing on the dotted line. The professional has the experience to identify any unusual terms or conditions.
Unless you have the cash to buy a home outright, you'll need some sort of financing to buy it. Most borrowers go the traditional route of applying for a mortgage loan from a commercial lender or credit union. If you think you won't qualify for these loans, accepting an owner-financed loan might be the only way to purchase a house. This is a viable option, provided the owner-financed loan has the same safeguards as a commercial loan.
Types of sales agreements with owner financing include a traditional-type mortgage, where the seller's money replaces the commercial bank's money for funding the loan. But sellers might also offer rent-to-own, lease-to-own or contract-for-deed agreements. A contract-for-deed agreement is also known as an installment sale or land contract. Buying a home using non-traditional types of lending agreements means extra risk for the buyer. For example, buyers in land contract agreements risk losing the house by missing even one house payment. Owners in this arrangement typically can ask for payment in full for the house if you miss a payment. Seek advice from a real estate agent or broker or a legal professional with experience helping buyers in realty contracts. These professionals know and understand the specific laws in your state applying to the funding options. Check state-issued licenses and membership in professional organizations of your advisors to select a qualified advisor. [New Fact checking: Resource #2 -- under "Contracts for Deed" --"Risk to the Buyer"]
Not only can you buy an owner-financed house with money down, the owner of your new house will probably require you to make a down payment -- sometimes a large deposit. While traditional mortgage down payments usually range from 3.5 percent to 20 percent down, owner-financed down requirements can be any amount -- including demands for 50 percent for buyers with credit problems. The down payment helps attach you to the new property by making it difficult for you to walk away from the transaction. If you abandon your owner-financed home, chances are your financing contract allows the former owner to keep some or all of your down payment. If your credit rating is low, expect to put a larger down payment on your new house. [Fact checking: #6, #7 & CE note] [New Fact checking: CE note & Resource #3 -- under "Buying Your First Home?"]
If your credit is not great due to a number of credit dings or a bankruptcy on your credit report, some owners request a larger down payment or some other sort of real property to hold against any potential losses. Some owner-financiers ask for a higher monthly payment to build up the equity in your new home at a faster rate. This creates a stronger link between you and your new house -- and less chance you'll leave without honoring your finance agreement.
Commercial lenders must meet federal guidelines and present you with mortgage disclosure documents, while owners doing self-financed loans can skip this step. If you go the private route, obtain a copy of this federal form from online sources and include the document as part of the private financing to protect your interests.
- Nolo.com: Qualifying for a Mortgage
- Realtor.com: How to Qualify for a Mortgage
- FHA Home Loans: FHA Loan Qualifying Summary
- Federal Deposit Insurance Corporation: Consumer Protection
- Board of Governors of the Federal Reserve System: Press Release
- Nolo.com: Seller Financing -- How It Works in Home Sales
- Wall Street Journal: The Wisdom of Seller Financing
- Bankrate.com: Mortgage -- Down Payment
- Realtor.com: Step 1 -- Are You Ready?
- Lending Tree: Down Payment
Lee Grayson has worked as a freelance writer since 2000. Her articles have appeared in publications for Oxford and Harvard University presses and research publishers, including Facts On File and ABC-CLIO. Grayson holds certificates from the University of California campuses at Irvine and San Diego.