When you want to buy a home for the first time, it can take a little while to get used to all the real estate and financial lingo. Owner financing is one of the most frequently misunderstood real estate terms. When buyers hear about it for the first time, they wonder "why in the world would the owner give me money to buy their home?" The reality is that owner financing can actually be quite advantageous for both the buyer and seller, but it can come with a few drawbacks too. Here is what you need to know about owner financing.
What Is Owner Financing?
When you first go to buy a home, you will quickly find that you probably do not have the funds to buy the property outright. In this case, you need to get someone to give you a loan. Normally, buyers go to the bank for a loan. However, they can also go directly to the owner of the property for financing. Owner financing allows the seller to directly provide the loan that the seller needs to purchase the property.
Explore the Different Types of Owner Financing
Now that you know a little about home loans basics, it is time to explore some of the details of owner financing. The simplest owner financing is when the seller negotiates a loan with the buyer, and then the buyer uses the loan to buy the house. Another form is leasing with the option to buy, in which case the seller still owns the house but lets the buyer put monthly payments towards the cost of the house. Sellers can also offer a junior mortgage as a form of owner financing. This means the buyer will get a big loan from a bank and a smaller loan from the seller to make up the cost of the property.
Benefits of Owner-Financing for Buyers
Owner financing is a great choice for buyers. The financing is entirely negotiable, so the buyers do not have to follow the rigid regulations of a traditional loaning institution. Buyers can get more favorable interest rates or get a loan even if they have bad credit. Without the involvement of a bank, buyers do not have to pay closing fees or wait for the bank to approve the loan.
Reasons Sellers Should Consider Owner-Financing
One of the biggest reasons for a seller to offer financing is speed. Owner-financing attracts buyers and generates more interest in a home, so it is useful if a person needs to sell a property fast. Sellers can choose to sell the property "as is" instead of having to make repairs that a bank would require. It can also be a good investment. Sellers continue to get monthly payments on the loan and interest, so it can be a way for sellers to get a steady flow of money over the years. There is a higher risk, but it might not be as bad as you would think. With bank financing, the down payment to buy a home is normally just around 8 percent, but with owner financing, the down payment can be as much as 20 percent.