|By Donna Allison on November 17, 2010
Wouldn’t it be great if in buying a home, you could make payments directly to the seller instead of using a mortgage? Then you wouldn't have to qualify. This can definitely be a good deal for you, but it is unusual. This is because the seller has to pay off their existing mortgage before they can sell to you, and few sellers have enough cash available. With a typical sale, the seller receives the money right away. When they owner-finance, you pay the cost of the home off, little by little, for perhaps 30 years.
However, owner financing can be a possibility when the seller doesn't need all the profits from the sale right away. In this case, owner financing can be a great investment. When the seller puts money in the stock market, he/she might get 6%, and some portion or all of it could be lost. By contrast, with owner-financing, the seller is guaranteed return of the interest rate on the loan. Sellers who owner-finance can charge a higher interest rate than banks because as a buyer, you can’t qualify for a bank loan. In this case the owner-financed situation can be very attractive to you. The main risk to the seller is that you could fail to make the monthly payments (known as "defaulting"). But in that case the seller can reclaim the house ("foreclose" on it) and sell it to get their money back.
In owner-financing, you can offer to pay a higher interest rate. Perhaps you can’t come up with the last several thousand dollars for a down payment. If your financial situation improves, and you've had the home for a year or two, you might be able to transfer to a lower interest rate with a bank loan. This can work, for example, when the seller finances only part of the loan. You can ask him/her to owner-finance this part, and offer him twice the current interest rate. If he/she accepts, you may only have to pay the higher interest for one year.
If you do find an owner-financed home, you will use a title company instead of a lawyer to make sure all is in order. If you want further protection, you can hire an attorney to check the paperwork.
Owner-financing can be a great option to save money in purchasing a home!