What Is Owner Financing?
Not everyone is familiar with the concept of owner financing and how to sell your house through owner financing. To put it simply, owner financing can be termed as an agreement between two parties, the buyer and the seller. This financing option is a better alternative to the traditional mortgage subsidized by the bank.
It works on the same principle as a bank loan as the seller is the one who finances the home and the buyer is to pay off the loan within a predetermined time. The loan itself starts with the buyer paying a big chunk of the loan, much like a down payment followed by the regular repayments. This amount also includes the interest that the buyer has to pay to the seller. The agreement is bound by a contract that includes all the details of the loan such as the terms of service, owner financing interest rate, and the timeline by which the loan should be paid off.
Is Owner Financing A Good Idea For The Seller?
While there are a lot of risks involved in terms of owner financing, it is still a very lucrative option for many of us. If you are on the other end of the picture and wondering ‘why would a seller do owner financing?’ – Let us assure you that there are many benefits of owner financing for the seller. For instance, the sellers can sell their property as it is, without making any changes. Furthermore, this also offers you an opportunity to keep your title if the buyer forfeits the deal. There are pros and cons of owner financing for both the parties involved, so you need to make a wise decision based on that. Let’s explore these:
What Are The Pros and Cons of Owner Financing?
Since there are two parties involved in this exchange, the pros and cons exist for both parties. Let’s discuss them one by one.
Pros and Cons of Owner Financing For the Buyer
Pros for the Buyer
Owner financing is a very cost-effective option for the buyer as it does not require you to pay any bank fee or other appraisal costs that can hike the prices.
To get a property this way you do not have to have to fulfill strict requirements. It is also a viable option for people who do not qualify for a mortgage.
Since there are no banks involved, you don’t have to wait for the long processes. You can close the deal a lot quicker. This is one of the biggest advantages of owner financing.
Cons for the Buyer
Every few months you may have to pay a high fee and that can pose to be a problem. You might not always have the finances and that can result in you defaulting the property
The seller is the authority here, you need their approval which can be hard to get as they might not want to finance you.
Big Interest Rates
Buyers usually have to pay higher interest on the loans as compared to what they would pay to a bank.
Seller Financing – Pros and Cons
Pros for Sellers
The advantage of seller financing allows them to close off the deal much quicker as compared to other options.
There are several tax benefits of owner financing and if you learn how to sell property through owner financing then you can reap a lot of benefits through the investment.
Easy To Sell
As a seller, you don’t have to make some significant changes to the property to sell it. Buyers can buy it without any changes.
Cons for Sellers
Your buyer can drop out of the deal because of a lack of finances. This can be a hassle for you as you might have to go through the process of foreclosure.
There are instances where you may have to take back the property and that means that you will have to invest your money in the repair costs. If the buyer did not take good care of the property, the repairs can amount to a large sum of money.
How to Sell Your House Owner Financing?
You may be asking the right questions, for example, you might be wondering, how to sell your house through owner financing? The process of owner financing is as follows:
Agreement of Terms
Here, the buyer and the seller should both agree on the terms and the conditions. They should reach an agreement on the promising note and all the conditions it contains.
Once the parties agree on the conditions, the buyer must make the down payment. This payment can be much greater than the regular payments. It works as a security for the seller, one of the biggest disadvantages of owner financing can be when the buyer drops out.
After the down payment, buyers are to start paying the monthly payment to pay off the loan. This also includes the tax implications of selling a house with owner financing.
Completion of Payments
Lastly, when the buyer is completely through with the payments, they will have to make a balloon payment to clear out the deficit.
What Are The Risks of Owner Financing?
Most of the time, people wonder ‘Is owner financing safe?’. On the whole, it may not be traditional but it is a safe option. Having said that, there are many risks involved in this, for example, it can be quite risky for the seller as they cannot ensure that the buyer will come through with the payments. Moreover, there may be some problems with the mortgage sellers already have on their house.
Other than such risks, there are not many problems with owner financing, and can be a lucrative option for many people who want to get their hands on a property without any hassles.
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