One of the more common financing methods in the down market is owner financing. Typically an Owner Finance option is available to sellers who own the property free and clear, or sellers who have banks allowing a seller financed wrap on the existing mortgage, the former is usually the case though.
- The interest rate is usually higher – Most people need owner financing because they cannot qualify for bank financing for some reason or another; in many cases due to self-employment or recent credit problems. It is not uncommon for rates to be 2-4% higher than par. The additional interest helps the investor/seller accommodate the risk they are taking on with the prospect, and in some cases additional interest is added in lieu of a higher price, allowing the purchase price to be lower, but collected in interest instead. If you are looking for a competitive interest rate, owner financing isn’t always the best case.r financed transactions typically operate differently than traditionally bank financed deals. There are five main points you need to know.
- You will need a down payment – Even with owner financing you need a down payment. The seller still has costs to cover in the sale (excise in Washington State, title, escrow etc.) Typically we see the minimum down payment on an owner financed property to be around 10%, but this may vary from deal to deal.
- They are traditionally short term – on occasion you will find a seller willing to take a 20 to 30 year owner contract, but normally they are amortized on a 20-3o year term but have a 3 to 5 year balloon in which all remaining principle is due and payable at the balloon. This is typically accomplished through a refinance.
- You will pay your payment to an in-between escrow company – there are a number of service providers who provide accounting for owner contracts, their fees vary but are usually less than $100-$200 per year and in most cases split equally between buyer and seller; although some sellers will not pay this fee as a standard. Your payments will go to the escrow company, they will take their cut and send the balance to the seller or pay other bills, underlying mortgages on the property as instructed.
- You can still be foreclosed on – An owner contract is just like any other mortgage except the bank is an individual and not a giant corporation. The individual has the same rights as a bank does to foreclose and take legal action against non-payment.