Different Options for Home Financing
Owner financing (also called seller
financing or owner carry-back) occurs when the seller of a property allows the
buyer to pay all or some of the purchase price over time. Typically, the
transaction is set up as a private mortgage. Buyers can obtain a mortgage when they
might not qualify for one otherwise, and can achieve lower closing costs. Before setting up a private mortgage, it
is wise to consult with your attorney.
In the case of "carrying back a second mortgage", the seller loans the buyer part of the seller's equity. When this type of mortgage is used, the buyer would finance the majority of the loan with a traditional mortgage lender and finance the remaining amount with the seller. Typically the buyer would pay a slightly higher interest rate on the loan financed by the seller.
The size of the down payment may affect the buyers commitment to honoring the mortgage contract. The larger the down payment the buyer invests, the stronger his/her motivation to protect the investment. In addition to making the monthly payments, the buyer's commitment to the investment would include a willingness to maintain and upgrade the property, as well as make tax and insurance payments. At a minimum, the interest rate you charge should match current interest rates traditional mortgage lenders are offering for loans of the same term. The amortization period should be as short as possible. This is the period in which the loan is repaid. The longer this period is, the greater the risk that the buyer will default.
A balloon payment is a common practice that entails having the full amount of the loan due on a certain date, usually in 5 to 10 years. This gives the lender a profitable short-term investment. The buyers equity in the property and record soft timely mortgage payments can help them secure a loan to cover the balloon payment.
Escrow is a way of transferring or exchanging property and/or money using a neutral third party. When a home or property changes hands, the seller of the property transfers the property title to the escrow agent. Similarly, the buyer either transfers funds or has a bank transfer mortgage proceeds to the escrow agent. When all conditions of the purchase agreement are met, the escrow agent assigns the property title to the purchaser and distributes the funds to the seller. This adds time and hassle to the financer, but protects you from the unfortunate situation of having a buyer make his/her mortgage payments but not tax and/or insurance payments.
Lender's title insurance is a very smart investment. This will protect your lien on the property from being defeated by a prior lien or other interest in the property. Things that can affect your rights as the financer include marriage, divorce, death, forgery, a judgment for money damages, a failure to pay state or federal taxes, etc.
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