For numerous reasons, alternative financing arrangements may appeal to you when buying a home. Two popular methods are rent-to-own and seller financing. Many people confuse these two concepts. You may be unsure of just how each works, in addition to which one may be best for your situation. Let’s take a closer look at both.
When it comes to renting to own, you as the renter or future buyer are given the chance to buy the home at a later date when you are better prepared financially to do so. Until that time arrives, the owner acts essentially as your landlord and is responsible for paying the mortgage payments. You will likely enter into a contract which spells out the terms of your agreement with the owner.
Often times, you will pay a non-refundable deposit at the beginning of the agreement. This deposit, in addition sometimes to a small portion of the monthly rent, may count as your down payment toward buying the home at the end of the established contract period. The contract period gives you time to improve your credit or finances in the hopes that you will then be able to finance the home’s purchase. Should you not be able to obtain traditional financing at that point, you may lose your down payment money or the seller could allow the contract to be restructured, granting you more time.
Seller financing is a concept that benefits both buyers and sellers. It allows buyers to get financing when they may not otherwise qualify and sellers to move their property more quickly than if they wait for a traditionally qualified buyer. In this kind of arrangement, the seller acts as a banker and offers credit to the buyer. Should you decide to choose this option, you would sign a promissory note laying out the agreed upon terms and then a mortgage or deed of trust is filed with the local authority that handles public records.
This type of financing can be tricky in terms of financial and legal issues, but it can be done. Perhaps the biggest risk is that the contracts associated with seller financing usually come with a five-year balloon payment, meaning that the financed amount will be due in full after a five-year period. The logic behind this is that you will have enough equity in the house and a better financial situation so that you can then obtain bank financing on the amount due.
In both types of arrangements, you would be paying the home owner until you are able to establish a financial situation that allows you to get a loan. The difference between the two is with regard to when ownership is transferred to you. There are risks in both situations. When renting-to-own, you risk the seller not paying mortgage payments and losing your home to foreclosure. In either case, you could lose your entire deal if you are unable to make monthly payments for some reason. Sellers also incur risk in non-traditional financing deals.
Before signing any agreements or making decisions regarding these types of home financing, always talk to a professional such as a real estate attorney.
All About Seller Financing Arrangements
In today’s tight housing market, sellers and buyers are looking for alternative ways to finance home or property ownership. Seller financing can solve this problem in a big way. While most people turn to conventional loans as a way to purchase a home, seller financing can drastically reduce costs all around.
With seller financing, the owner carries all or part of the note and is in a sense, now the lender. The biggest benefit to the seller is they are more likely to get their asking price. They can also get a bigger return on their investment as the interest rate is generally higher on a seller financed loan.
While a down payment is not required, the seller should request at least 10% down to minimize the risk of extending the loan. A buyer is less likely to default if they have a substantial investment towards ownership.
Many sellers are hesitant to provide owner financing, but these loans are relatively short-term, about 5 years opposed to 30 years loans with a conventional bank. Monthly payments, interest rates, and term of the loan are negotiated between seller and buyer. While requirements are more flexible for seller financing, the seller should always maintain the right to refuse the loan to a potential buyer.
One of the most important things to consider when providing seller financing, is to have a lawyer or loan servicing company assist with drawing up the promissory note or other paperwork necessary to protect the interests of both parties. The paperwork is then filed with the state. Be sure that the terms state that the property itself is securing the loan. If the buyer defaults through nonpayment, then the seller has recourse to regain the property just like the bank would.
To help determine credit worthiness, the seller should require a loan application then verify the information provided and run a credit check. In this way, the seller can minimize the risks of providing the loan. To ensure that a fair price is being asked for, a current appraisal of the property should be made.
While there seems to be mostly benefits to the seller by providing owner financing, the buyer also gains benefits. Seller financing is easier to get approved for, there are no points to pay, no commissions, faster closing of the sale, and monthly payments could be less than a conventional loan.
Two other seller financing options available are the sale of land, and lease with option to purchase. In the case of land, the only difference is that the buyer gets the deed, rather than the title upon payment in full.
With a lease option, rent is paid monthly for a certain period of time. Then all or part of the rent payments are applied to the down payment and the owner can carry the rest of the note.
Seller financing is certainly an option to be considered, or asked for, by both owners looking to sell, and potential homeowners looking to buy.