If you're anxious to sell your home -- and especially if deals have fallen through because buyers can't get a traditional loan -- owner financing can be enticing. Instead of waiting for a buyer to get approved by a bank, you become the bank yourself. You just collect a check every month until the buyer is paid up. Seems simple, until you think about all the things that can go wrong.
The Long Wait
Sell your home to a buyer who has lined up financing the traditional way, and you get a check for the full amount of the sale price. When you sell with owner financing, though, the buyer pays you over time, which means you won't see the full amount for years. Getting a sizable down payment from the buyer can take some of the edge off -- although a buyer who can't get a traditional mortgage might not have a lot of cash available. To shorten the payment period, the legal information website Nolo notes that many owner-financing deals provide for the bulk of the loan to come due as a "balloon payment" five or so years down the road. By that time, the buyer will have built equity in the home and will hopefully be able to qualify for a regular mortgage.
The Check May Not Be in the Mail
When borrowers miss payments, banks have collections departments to make phone calls and knock on doors trying to track down the money. Understand that if you provide seller financing, this becomes your responsibility. If worse comes to worst and the buyer quits paying entirely, it will also be up to you to foreclose. This is time-consuming and expensive. "Mortgage News Daily" says the costs of a foreclosure for a lender -- which, in the case of owner financing, is you -- can run into the tens of thousands of dollars. That includes not only the loss of income from the mortgage payments the buyer isn't making, but also legal fees and the simple fact that a foreclosed property can lose value. The risk of foreclosure is another reason it's smart to try to get a substantial down payment; borrowers are less likely to default if they have a lot of their own money sunk into a home.
The consequences of non-payment make it critical that you do your homework on the potential buyer. When you apply for a traditional mortgage, the lender examines your credit report, maybe checks your criminal history and verifies your employment, income and assets. Before offering to finance the sale of your own home, you'll have to check out the buyer the same way. Ask yourself whether it's something you want to do, and whether you feel qualified to do it. For example, what does a "bad" credit report even look like? Of course, you could skip this unpleasant task -- but remember that if you're considering owner financing, it usually means the buyer couldn't obtain a regular bank loan, or wouldn't try. You ought to know why.
The Ongoing Headache
The house you sell isn't "yours" anymore. But as long as the buyer still owes you money, as long as there's a possibility that you might have to take the house back, you have a financial interest in the home. This is why traditional lenders are sticklers about making sure that the home is insured, that the property taxes are paid and that the home is properly maintained. You'll need to stay up on these things, too. If the insurance lapses and the home burns down, the buyer can walk away, and you end up with neither the house nor the money. If the property taxes go unpaid, the local government can place a lien on the house, which gives the government first claim on the property -- up to and including the right to seize it and sell it to get the tax money. And a home that falls into disrepair will usually lose value.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.