Wednesday, May 28, 2014

Is Owner Financing a Good Deal for Home Buyers?

Is buying a home that is financed by the seller better than obtaining a traditional mortgage? Well, first of all this type of situation is pretty rare. For those persons that have difficulty getting approved for a traditional home loan this scenario may seem like a good deal but there are many things to consider before making such a big decision.

The first step for a home seeker is to actually find a seller that is willing to finance the mortgage themselves. This is often very difficult because the current owner must pay off their existing mortgage completely before they can legally sell the home to someone else and obviously most people don’t have this amount of cash just lying around. Secondly most people that are selling their home want the cash now and not over a period of years. It’s a big risk to sell your home and to become your own banker. Many things can go wrong and very often the seller ends up on the losing end of the stick.

The age of the seller is also a big consideration. If you were 40 years old and selling your home would you want to wait until you are 70 to finally be paid in full? Even though most sellers are not willing (or able) to consider this type of transaction there are some buyers that are able to locate a willing seller and make an agreement. If you are one of those people here are a few important things to keep in mind.

In a situation where the seller is playing the role of the bank they will often want to charge a higher interest rate than a traditional lender. This is completely understandable considering the amount of time they will be investing but of course this equates to spending more money on the side of the buyer. Unless you are 100% sure that you cannot obtain a loan from a lender at a better interest rate than there really is no reason to consider this option. On the other hand, if this is the only possible way to buy your own home than it may be worth a closer look. Keep in mind that if you are able to obtain a more traditional loan in the future that you would then be able to pay off the seller in full but make sure that this is not prohibited in the contract that you sign and that there is no fee or penalty for early payment.

There have also been some cases where the seller has agreed to finance only a portion of the loan because the buyer could not get approved for the entire loan amount but was able to cover some or most of the cost. Again it may be possible to obtain traditional financing in the future to pay off the debt with the home owner completely.

Many times when a home is being financed by the seller the entire transaction does not involve a realtor on either side of the deal. This means that as the buyer you will be “going it alone” and I find that to be scary. If this is the case I would suggest that you seriously consider hiring an attorney in the matter. You really need someone with expertise and experience in your corner when you are making such a huge investment and one mistake can affect you for many years to come. Overall I would suggest using a realtor and obtaining traditional financing if at all possible but if you have no other choice this might be one way to get your own home.

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