When you’re in the market for a new home, you’ll very likely run into homes that offer financing by the owner, but what does that really mean? Is owner financing something that you should look for, or does it only benefit the seller of the property?
There are many different types of financing offered by the owner/seller of the property, but these types of loans still have to follow strict guidelines. In most cases, you have no need to worry about the loan’s authenticity or terms and conditions.
What Is Owner Financing?
Simply put, when the owner of a house offers their own financing, it means that that owner is going to put up at least part of the money you’ll need to purchase the home. You can combine this loan with a traditional loan from a bank or financial institution if you wish, and the interest rates, terms, monthly payments, etc., are all spelled out in the paperwork just the same as with a loan from a bank. The only difference is that you’ll be making payments to the owner of the property instead of the bank.
In addition, there are three main types of seller financing and they are described below.
- Land Contracts
With a land contract, the title of the property isn’t passed onto the buyer until the entire amount has been paid to the seller. In the meantime, the buyer gets an equitable title only. The buyer will continue to make payments to the seller until the loan is paid off or until the buyer decides to refinance.
Regardless of what the buyer does, they do not receive an actual deed until the loan is paid off. In these contracts, the seller is called the vendor and the buyer is the vendee. Since the vendor doesn’t hand over the deed until the loan is paid off, they can keep the title until all of the monies have been received.
- Lease-Purchase Agreements
Also called a rent-to-own agreement, the buyer is merely leasing the property and therefore as only an equitable title in the beginning. Once the terms of the lease-purchase agreement have been fulfilled, the buyer will receive the title. At this point, the buyer usually obtains a loan so that the seller can be paid.
The buyer receives credit for the rental payments, either in full or in part, toward the purchase price. The buyer benefits by having some time to gather the down payment needed for the loan. The seller benefits from not having to make payments to the bank while the buyer is leasing the property.
- Mortgages
Much the same as a bank mortgage, the seller can finance the entire loan amount, minus the down payment, and the seller usually receives an override of interest on the underlying loan. The buyer usually receives the deed and then gives the seller a second mortgage for the
balance. This type of financing is often called a wrap-around mortgage, an all-inclusive mortgage, or a trust deed. It works very similar to one financed by a bank; the main difference is that it is the seller who is lending the money to the buyer.