There are many options when it comes to taking out a loan on a new home. One of the options that people might have heard about is called owner financing. In general, the property owner takes the place of a traditional lender.
Instead of someone taking out of a loan from a bank or a credit union, they take out a loan from the owner of the property. Similar to a traditional loan, the buyer will make payments to the seller over a period of time with a certain interest rate.
The Structure Of Owner Financing
If someone elects to go with owner financing, there are several terms that will specify the repayment structure. The most common structure is called a note and mortgage.
This is a secure form of financing. It is also the closest in structure to a traditional mortgage from a bank. The seller will put together a note that specifies the size of the loan and how it will be repaid. The mortgage will secure the seller with the property in case the borrower cannot repay the loan.
The buyer is still placed on the title of the home. Then, the mortgage is recorded with public records, just as in a traditional loan. There are other types of seller financing; however, this is the most common structure.
The Structure Of Repayment
You may have questions regarding this type of financing when compared to a traditional mortgage. Just as in a traditional mortgage, the repayment terms can vary. You will still have the opportunity to negotiate the terms of the loan.
Typically, interest rates are close to that of a loan from a bank or credit union. There are still options to set up a fixed-rate or adjustable-rate mortgage as well.
The Benefits Of Seller Financing
There are several benefits for both the buyer and the seller. First, seller financing may allow the seller to avoid paying capital gains taxes on the property. This can also help the seller offload a property that otherwise might not sell.
The buyer will also be able to purchase a home without having to borrow from a bank. Often, there is less paperwork and fewer fees. Finally, a buyer that might not qualify for a traditional bank loan might be able to buy a home through seller financing.
Understanding Owner Financing
It is important for everyone to think carefully before signing up for this type of financing. This is a unique option that you should understand when looking for a home. Consult with your trusted home mortgage professional to get the best answer for your particular situation.