By Mike Colpitts
Faced with a tight mortgage market, owner financing is growing in popularity as more homeowners market their homes to benefit new owners. But misconceptions over the easy availability of homes financed by their current owners keep many wannabe buyers from making home purchases.
U.S. banks offer mortgages under tightly regulated criteria to home mortgage purchasers. Most guidelines are under written by Fannie Mae and Freddie Mac regulations. However, lenders also select what mortgage rates to offer borrowers based on credit scores and employment history. If a mortgage borrower doesn’t meet one banks standards they may do better with another lender.
But with owner financing the homeowner is able to offer mortgage interest rates and terms at their own discretion based on their opinions of the purchaser. Working with a buyer on the amount of down payment required and length of the mortgage is just a couple of the terms sellers can determine.
Borrowers benefit by being able to directly work with the homeowner on the price of the property and negotiate terms acceptable to both parties. Owner financing mortgage rates are typically a little higher than what conventional banks offer to customers, but sellers usually also limit the requirements to make a loan.
The owner or seller benefits by making an installment sale to the purchaser, often providing a lower federal tax rate, particularly on investment property. The key to reducing the risk for many owners considering owner financing is requiring a larger down payment from the buyer.
Additional benefits include a better chance of getting the property off the owners’ hands, more flexibility on the terms of the contract and lower capital gains taxes.
Owner financing has been around for years, but lost popularity as record low mortgage rates and easy money qualifying drove the real estate bubble. But with the foreclosure crisis and tighter mortgage lending conditions now controlling the marketplace, owner financing is making a comeback. The return is attracting thousands of home buyers to successfully purchase homes who would otherwise be unable to do so as a result of credit flaws and other issues.
Borrowing from a seller directly can also mean saving money for a purchaser on loan origination fees, points, appraisals and other fees typically associated with obtaining a conventional mortgage.