By Mike Colpitts
Owner financing is making a comeback in the housing market as homeowners look for ways to sell their homes in the sluggish economy. Selling a home with an owner carrying the mortgage was hardly heard of during the housing boom, but it’s returned out of necessity as more owners explore alternative ways to sell their homes.
A tight mortgage market driven by the most rigid loan underwriting guidelines in decades coupled with high unemployment has stalled home sales in most of the U.S., despite near record low mortgage rates. The conventional fixed 30-year mortgage averaged 3.98%, according to Freddie Mac last week, just four basis points off its all time record low.
Advantages of selling a home through owner financing out-weigh risks for some homeowners, but present a series of issues that could pose problems. Writing off a profit on a home over a long duration on federal income taxes is an advantage for a homeowner fortunate enough to make a profit. But taking a risk on a buyer defaulting on the mortgage could out-weigh the advantage.
In the case of owner financing, the seller assumes the role of the bank and finances the purchase, usually with a sufficient down-payment. But in these tough economic times homeowners may have to settle for 5% or 10% as a down payment if they really want to sell their home. Providing seller financing could mean the difference between selling a home and not selling.
“A seller can negotiate an interest rate that the buyer will pay them that is more favorable than would be available for other sorts of investments,” said Brian Moore, an Ohio attorney who practices real estate law.
Owner financing can be used to pay for a property completely or partially. A second mortgage could be carried by the owner in place of a larger down payment. The seller has more freedom determining the terms of a transaction than in federally regulated mortgages.
A variety of avenues are also used to sell homes that currently have mortgages, including wraps, which are against federal lending guidelines in most cases. Federally insured loans by Freddie Mac and Fannie Mae usually have a due-on-sale clause, requiring the mortgage to be paid in full at the time a property is sold to another party.
To get around this obstacle, some homeowners who are unable to pay the mortgage-off and sell the home to the buyer without recording the deed in public records. Others record the deed and assign the risk for paying-off the mortgage to the new buyer. Whatever parties decide to do in the course of a real estate transaction it’s always a good idea to obtain legal counseling on real estate issues.
As the country struggles with a tough economy, record foreclosures and high unemployment, finding a buyer at all could prove difficult for many homeowners wanting to sell. Closing a deal on a home also takes less time with owner financing than a conventional loan.