When an individual decides it is time to purchase a home, the most common route to achieving this end is to locate the desired property, negotiate a purchasing price and then secure a mortgage that will ensure that the needed funds are available. Mortgages have been a staple of the American housing market for years, and have provided individuals with solid financial credentials the opportunity to borrow large sums of money. In the event that an individual does not qualify for a mortgage, however, other options may be available. Owner financing, also referred to as seller financing, is an arrangement in which the current owner of the property provides financing for the new buyer, allowing the latter to enjoy a convenient payment schedule.
The Basics of Owner Financing
Although owner financing is less common than traditional mortgage financing, it is nevertheless a powerful tool for facilitating home purchases. For some individuals, past financial missteps may have severely impacted their credit history, making it difficult to match the financial qualifications imposed by mortgage lenders. This does not mean to imply that these potential buyers are not qualified to purchase a home, but rather that their financial history poses a level of risk to mortgage lenders that is beyond their threshold of safety.
Owner financing allows the buyer and seller of the property in question to negotiate a specific set of terms related to the sale and financing of the property. Essentially, the current owner of the property has the ability to establish any financing terms they deem appropriate for their property, as well as set the sale price.
Pros and Cons of Owner Financing
For both buyer and seller, an owner-financed home sale carries its own fair share of benefits. By and large, these transactions tend to occur at a much more rapid pace than traditional mortgage-backed deals, due in large part to the fact that no large financial institution is involved in the transaction.
For the buyer of the property, owner financing also dramatically cuts down on the closing costs which typically occur as part of a sale. Varying costs, such as origination fees, are scrapped entirely, allowing the buyer to put more of their funds directly toward the purchase of their property.
Potential Downsides of Owner Financing
That being said, buyers should also be aware that the convenience of skipping the oversight of banks will likely mean that the terms they receive as part of owner financing are potentially less advantageous to them than they would be through a conventional mortgage. This is due to the fact that the current owner of the property assumes the type of risk that banks would typically carry as part of a mortgage. In order to ensure that the transaction is worth the effort of overseeing financing terms with the new buyer, sellers may choose to tweak the borrowing agreement in order to rake in larger earnings over the duration of borrowing.
How to Find Seller Financed Homes
For those interested in purchasing an owner-financed home, the first step is knowing where to locate these properties. Many of the real estate multiple listing services, also referred to as MLS, do not include owner-financed properties in their directories. Because of this, future buyers may have to get somewhat more creative to locate these homes. An excellent first step would be to browse Internet forums and ad posting platforms, such as Craigslist. Here, future buyers will likely be able to browse an extensive directory of properties for sale by owner.
In the event that this process does not yield quality results, another possible solution is to speak with a realtor directly. Although their MLS may not directly show these types of properties, the chances are good that a realtor will have extensive knowledge of what may currently be available to locate these options.
In some situations, prospective buyers may find that speaking directly with owners of rental properties may be open to negotiating a sale. There is no way to ensure that this is a possibility without asking, however.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community. Ryan's work has been featured at Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.