Instead of borrowing from a bank to finance your new home, sometimes you can borrow from the seller. If the deal works, it's a win for both of you. You can avoid underwriting fees and can buy a home with a lower credit score than a professional lender will accept. In return, the seller gets a better price, and she profits from the interest instead of a bank.
Don't assume owner-financing guarantees you're getting a great deal. The owner may want a bigger down payment or higher interest rates than a bank, and he probably won't want to wait 20 or 30 years for the full payment, either: Seller-financed mortgages often end after five years followed by a balloon payment, at which point you'll need a regular mortgage to pay off the loan. Sellers do, however, have more freedom to compromise as they don't answer to a bank manager. Be prepared to negotiate until you get a deal you can both live with.
Negotiation includes deciding which of several methods will work for you. The seller can accept a down payment and a promissory note, just like a bank would, or cover part of the price if you can't get a large enough mortgage. You and the seller can negotiate a lease-to-own arrangement, or use a land contract under which the seller hangs on to the title until you pay off the loan. If you and the seller can't agree on how to finance the house, you've got no deal.
Even if owner-financing is the only way you can land a loan, think carefully about the risks. If you don't think you can obtain a conventional mortgage when the balloon payment comes due, the seller can foreclose on the house. If you sign a land contract and the seller retains title, you lose all the money you've spent on the house if the seller forecloses. Unless you're a professional, look for a real-estate agent or attorney to go over the deal and confirm that everything is legal and financially feasible. Don't agree to any deal you don't understand.
Owner financing doesn't mean you can close the deal with just a handshake. Title problems can crop up just as easily as with a conventional mortgage, so pay for a title search and title insurance to protect yourself. Rather than close the deal casually, find a title company that understands owner-financing and schedule the closing at the company's office. Although owner-financing deals can be flexible, once you sign the contract, they're just as binding as a conventional mortgage.
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- Can a House Be Sold Without Clearing the Title?
- How Does Buying a Short Sale Work?