Before deciding whether to buy an owner-financed home, pay close attention to the ins and outs of the terms and conditions. It's important to understand the loan details, including interest rate, down payment amount and repayment schedule. If you are able to obtain a traditional mortgage, it may be better to seek out an experienced loan originator and hammer out the details of a 30-year loan. However, depending on the details of your situation, there can be many advantages to buying a house with seller-financing.
Seller financing might be a good option for those who can't obtain a traditional mortgage. Typically this is due to some type of credit issue or recent foreclosure or bankruptcy. Other reasons can include a lapse in employment history or irregular income due to self employment. Be prepared to pay a higher than average interest rate to offset the risk for the seller.
Lower Closing Costs
Buyers who partake in seller financing have little to no closing costs at escrow. Due to the lack of a conventional mortgage, there's no need to pay any loan origination fees, lender's title insurance or other miscellaneous fees. This can save most buyers up to three percent of the purchase price at closing. However, you may be required to come in with prepaid taxes and homeowner's insurance, depending on how the deal is set up.
Negotiable Interest Rate and Terms
In a seller financing situation, the terms of the loan are negotiable between buyer and seller. Contract items such as interest rate, amortization schedule, late fees and any pre-payment penalties are all agreed upon by both parties. Often, a buyer is able to leverage a lower interest rate or other contract term in lieu of an item favorable to the seller. For example, most buyers can obtain a lower interest rate from a seller with a sizable down payment rather than a higher interest rate with little money down.
Since there's no waiting for an appraisal, bank underwriter or loan processor to give you the green light and close on the deal, closing on a seller-financed home can go very quickly. Usually all that's needed is the buyer and seller to agree on contract terms and then to proceed to the closing table. Most buyers, however, may want to hire a home inspector prior to signing on the dotted line and also have their own appraisal to ensure the home is worth the asking price.
Meribeth Phipps has been a real estate broker since 2000, specializing in residential new home sales. She holds a bachelor's degree in business and marketing.