Owner Financing, Seller Financing, Wrap Around Mortgages, Due on Sale Clauses, Installment Sale Land Contract, Land Sale Contract
Owner Financing, Seller Financing, Wrap Around Mortgages, Installment Sale Land Contract, Land Sale Contract, - These are just a few of the names that are associated with owner financing. They basically all mean the same thing - that the seller finances the buyers purchase at a set price and a set interest rate.
Here at Tri Cities Homes For Sale we can help you navigate the waters of owner financing and give you sound advice on whether or not seller financing is right for you.
One of the best and fastest ways to sell your home in the current tough economic times is to offer some type of creative financing. However there are a lot of pros and cons to owner financing.
Benefits to owner financing.
For the past few years the banks have been very tight when it comes to lending money to anyone without perfect credit, large down payment, and a long employment history. This means that a lot of good potential buyers are unable to buy a home the conventional way, by getting a loan. Even if the buyer has money down and decent credit, if they have recently switched jobs, or found a job after a period of unemployment they may have trouble finding a loan.
Owner financing allows a seller to work with the many buyers out there who may have some money down but are finding it difficult to get a loan.
By offering seller financing you can often sell your home much faster than by listing you home or selling through the old fashioned methods.
By offering owner financing you are much more likely to get your asking price or close to it.
Quicker Closing and Lower Closing Costs.
With offering owner financing you can often close the deal in a week or less. No need to wait 45 days or more for a traditional lender to under right the loan. Also you likely do not need to buy the buyers a seller’s title insurance policy or other closing costs which could save you quite a bit of money.
Small Profit Each Month.
Often with owner financing you can charge you buyers a slightly higher interest rate than you are paying to your own bank – this could add up to a few hundred in profit each month.
Due on Sale Clauses - Acceleration Clauses…
Most – if not all mortgages in the U.S. have what is commonly called a Due on Sale clause. The due on sale clause normally has a different name or is under a different heading in your mortgage, but call a due on sale clause by any other name and it still works the same.
Basically a due on sale clause states that if you transfer any interest in your property to buyer or potential buyer, or give up possession and the right to sell the home, the lender may call the loan due (often called accelerating the loan). This means that the bank will give you a 30 day notice that they want you to pay off the full mortgage within 30 days or they will start the foreclosure process.
Is it likely that the lender will call the loan due and foreclose? Not Very - At least not right now!
Most banks have enough foreclosures on their books that they are not actively seeking new ones so it may seem unlikely that a bank will exercise their right to call the loan due. However, there have been times in the past when interest rates were higher that banks were actively looking for ways to get the low interest rate loans off their books and one way to do this was to look for the wrap around mortgage or owner financing agreements and call the loans due, forcing the new home owner to get a higher interest rate loan or lose the home.
You shouldn't just brush all concerns about the due on sale clause aside if you are going to try owner financing with an existing mortgage.
So if you are concerned about the due on sale clause what can you do??
One thing you can do is ask the bank to modify your loan by striking the language in the mortgage that doesn’t allow for owner financing. All banks now have loan modification departments and most banks would rather strike a term in the contract than end up with another foreclosure on their books. So often asking can solve the problem – however these departments have a lot to do right now and could take months to get back to you – many buyers will not wait months for a response.
Add Protection to the Owner Financing Agreement.
Put language in the owner financing agreement that would protect you if the bank called the loan due. Force the other party to get a loan, or force them to deed the property back to you and turn the buyers into tenants with a possible future option to purchase. There are a number of ways to add some protection into the deal – discuss your options with you real estate attorney.
The largest con to owner financing is the possibility of default by the buyers. If the buyers quit making payments you will need to start foreclosure proceedings to take back the home. You will also have to make sure your mortgage stays up to date so that your bank doesn’t start foreclosure on you. This could take up to 6 months and cost a few thousand in legal fees. At a minimum you should try to get a down payment that will cover 6 months worth of payments and put some of that money away in case things get ugly. Also if home prices drop or the buyers lose their job they could just walk away from the home – even if they kindly deed the home back to you so that you don’t have to foreclose, you may be stuck with a home that is now worth less then it was. Because many sellers never report these things to the credit reporting companies and don’t sue for deficiencies the buyers can often walk away with almost no repercussions beyond the loss of their down payment.
Bottom Line is like most decisions there can be some benefits and some risks associated with seller financing. If you need help making the decision give us a call and we will connect you with our local real estate attorney to help you make out.