We’re here with another hot topic that’s been gaining interest among home shoppers – Owner Financing. I sat down with some friends this week to discuss whether they should look for listings with owner financing instead of going the traditional mortgage route. I’ll break down the ins and outs, just like I did for my friends – but the short answer is the risks aren’t close to worth the couple percentage points you’re looking to save on interest rate.
What is Owner Financing?
Owner financing is when the home seller also funds the purchase for the buyer. The seller takes the place of a traditional lender. Home buyers usually look into owner financing as a last resort when they feel they can’t finance a home any other way. It might seem like a slick solution for buyers struggling to get a mortgage, but this is one gift horse worth looking in the mouth.
Pros of Owner Financing:
Requirements are more Lax – Sellers might not require a high credit score or big down payment. That’s why it sounds attractive to buyers struggling to qualify.
PRO TIP: There are loan programs designed just for low credit borrowers, AND programs for borrowers who can’t put down a full down paymentFaster Time to Closing – With less red tape and paperwork, and more handshake, seller financing can speed up the closing process with less legal protections for the buyer.
Possiblity of Lower Interest Rates: The seller and buyer can negotiate the interest rate. Since profit on loan interest motivates seller to keep paying the mortgage, it usually isn’t any lower that what buyers could qualify for through a traditional lender.
Cons of Owner Financing:
Balloon Payments – Many owner financing agreements include balloon payments that could result in a large lump sum due a few years into the loan, which can be financially devastating if you’re not ready for it.
Lack of Legal Protections – Traditional loans come with numerous protections for borrowers. Seller financing doesn’t offer the same security, potentially putting home buyers at risk.
High Chance of Higher Interest Rates: Since profit on loan interest motivates seller to keep paying the mortgage, it’s often similar to what buyers could qualify for through a traditional lender or even much higher.
Owner Financing: Boom or Bust?
Owner financing can seem attractive in the face of rising interest rates, booming home prices, and ballooning down payments. But there are a lot of risks involved, and home buyers could easily find themselves in a financial nightmare and underwater. That’s why I always stress financial literacy and making smart money moves.
PRO TIP: There are loan programs designed specifically for buyers with lower credit scores or limited down payments. These loans come with the legal protections you deserve and offer a safer pathway to homeownership. Reach out to the team at Milend to discuss these alternatives and ensure that your path to homeownership is as smooth as possible.
As always, I’m here to guide you through the maze of home buying and selling. Let’s make your financial goals and homeownership dreams come true!
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