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Homebuyers who are struggling to qualify for a traditional mortgage loan, now have an option of owner financing. Buying a home with owner financing is a rare but legal way to finance your home purchase.
Borrowers can work directly with the seller on a financing deal that benefits both of them when they choose owner financing.
Owner financing is also called seller financing when a property owner finances a home purchase and collects the loan payments from the borrower like a traditional lender. In this arrangement, the buyer doesn’t need to take out a mortgage.
The hitch being, the interest rate will be higher than what a lender charges and another challenge are the term payment would be much shorter than that of the traditional loan.
The borrower needs to make a downpayment undergo a strict credit check and have their income verified by the seller.
Once the terms are agreed upon, the borrower and the seller will sign a promissory note, which is a legally binding document to establish the agreement.
The promissory note states that that the borrower intends to pay the seller back along with the terms of the repayment plan.
There are many options when buying a home with owner financing like:
Free and clear: The property of the seller is mortgage-free, so less legal or financial issues in the future.
Junior mortgage: the seller takes a second mortgage to help you clover the financial gap from your 1st mortgage and you pay it directly to the seller.
Wraparound mortgage: The seller’s property is on the mortgage and he borrows a 2nd mortgage to wrap around to cover for their balance loan and your new loan.
Land contract: Equitable title is given to you while you are making payments and it allows you to receive the legal title on the property when the full and final payment is done by you.
Lease purchase agreement: You rent the property for a certain time then you buy it when you have enough cash. The rent contributes to the purchase price.
Before entering into any agreement as a home buyer
- Do a thorough check on the home’s value.
- Do a property title search and verify that it is all clear.
- Do a background verification on the seller
- Has the home inspected for repairs
- Involve a real estate lawyer review through all legal technicalities.
Compare the rates and terms with other financing options.
Reference Source: Credible
