At the time of purchasing a property, you will notice that there are multiple financing options available to consider. However, all these financing options will not deliver the best returns to you. That’s why it is important for you to understand what financing options are good for you to proceed with or not. One of the most prominent financing options that you will come across is owner financing. Keep on reading this article and we will share whether owner financing is the perfect option available to consider.
What exactly is owner financing?
Purchasing a property will be the biggest investment that you can ever make in your life. That’s because you will have to spend a lot of money to purchase the property. Hence, you will mostly come across the need to go ahead with one of the financing options. A mortgage is the most common financing options available out there. However, there are some excellent alternatives to traditional mortgage financing. Owner financing can be considered as a great option available out of them for you to consider.
When it comes to owner financing, the seller will not handover money to the buyer, as it would happen when completing a transaction with a mortgage lender. In here, the seller would extend credit, so that you will be able to cover up the purchase associated with your property. Therefore, you will only have to make a low down payment. After that, you will be able to continue to make payments, up until you complete the full payment.
As a buyer, you will also have to sign a promissory note and give that to the seller. Then the seller would clearly explain terms associated with the loan. They include the repayment schedule, interest rate, and default consequences. The owner might be able to keep the title of the house, up until you will complete making a payment to complete the loan.
In most instances, owner financing transactions are short-term deals. It would usually be an arrangement to amortize a loan for a duration of 30 years. There will be a balloon payment, which has to be paid after five years or ten years. The benefit associated with this situation is that the buyer will be able to build enough equity in the property. Or else, it is possible for the buyer to improve the financial situation, so that he can go for a mortgage.
Owner financing is a good option available for both sellers and buyers. However, you should also understand that there are some risks associated with it. Let’s take a look at the benefits and drawbacks of owner financing. Based on that, you can make a clear decision on whether you go for it or not.
Benefits of purchasing a property with owner financing
As the first thing, let’s take a look at the benefits that you will be able to secure by going forward with owner financing.
– You can secure a faster closing
Owner financing is a great option available for people who wish to secure a faster closing. That’s because you don’t have to wait for the underwriter, bank loan officer, and the legal department to help you with the application process. If you don’t want to spend your time, you should go ahead with owner financing.
– You can close it without spending a lot of money
If you take a look at the closing expenses associated with your owner financing, you will figure out that it is cheap. That’s because you don’t have to deal with any appraisal costs and bank fees. If you have any plans to close the loan within a short period of time, you can think about going forward with this option.
– You can get flexible down payments
One of the key benefits associated with owner financing is that it will provide you the chance to expose yourself to flexible down payments. That’s because there is no need to stick to a government-required minimum. There is no bank minimum as well.
– It is a good option for the buyers who are not in a position to get financing
Getting a mortgage will not be an easy thing to do. You will have to adhere to numerous restrictions when you are about to get a mortgage. If you fail to secure a mortgage, you may take a look at owner financing. That’s because the terms and conditions associated with getting a mortgage are relatively low.
Drawbacks of purchasing a property with owner financing
There are some drawbacks to owner financing as well. You should also be aware of them before you get owner financing so that you can refrain from encountering any difficulties.
– There is a high-interest rate
The interest rate associated with owner financing is relatively high. If you don’t want to spend your money unnecessarily on the interest rate, you will need to keep this fact in your mind.
– You will need seller approval
To proceed with owner financing, you should have the approval of your property sold. Not all property sellers would agree to provide the approval to you. Therefore, you will need to look for a lender who can provide you owner financing.
– You will have to deal with balloon payments
As you go ahead with owner financing, you will have to deal with balloon payments. It is true that balloon payments would usually come to you after five years or ten years. In case if you cannot secure financing for balloon payments, you will tend to lose all the money that you have paid. On the other hand, you might even lose your house as well.
Now you are aware of the pros and cons of owner financing. Keep these facts in mind and analyze both pros and cons. Based on that, you can proceed with owner financing and get the maximum returns that come on your way.