Thursday, March 25, 2010

Owner Financing or Carry-Back Loan

An owner financed or carry-back loan is when the seller usually owns the property outright and is willing to either hold the loan themselves, rather than a bank, or lease/rent the property to the buyer for a fixed period allowing the buyer more time to obtain favorable financing. For a buyer the key is to find a seller that will offer this possibility. In the present real estate market, many of the homes on the market are distress sales, which mean there is little chance of making a deal with the seller.

How does Owner Financing Work?
When a buyer is having trouble obtaining a loan or favorable financing, they may request their agent to contact the seller on their behalf, requesting seller financing. The seller loan can take the form of a first mortgage or a second mortgage. If the property is fully paid off then the process is simple. The seller and buyer come to an agreement on the sell price and the monthly payment and the sell has a first mortgage on the property. On the other hand if there is already a loan the process is the same except that the carry back loan will take a second position (second mortgage) to the existing loan. The buyer in this instance will need to be more careful because if the seller collects the buyer’s monthly payment and fails to pay the mortgage on the first loan the bank could foreclose on the property leaving the buyer with nothing. Another scenario is the buyer obtains a first mortgage loan but does not have sufficient funds the down payment so the seller finances a portion of it. Be sure to work with a qualified attorney for any carry back loan contracts.

Why Use Owner Financing?
If a property is old and in very bad shape, for example the foundation/slab is cracked, most banks will not consider loaning against the property. The options for the seller is to find a buyer with all cash, someone willing to obtain a hard-money loan, or provide the financing themselves. Second, for a buyer there are several good reasons to do a carry back loan. The first is if the buyer does not qualify for a loan due to poor credit, bankruptcy, or a foreclosure on a previously owned property. The second reason is if the buyer is self-employed or most of his/her income is from commission. The third good reason is to avoid closing costs for a loan, which is about 2% of the purchase price. And the finally reason is the whole purchase process can be done rather quickly if the buyer is in a hurry to move into a place.

Example:
The seller and the buyer agree on a sell price of $100,000. Since the buyer is self-employed the bank requires him to put down 50%. The buyer only has $10,000 to put down so the seller agrees to finance $40,000. To sum it up the buyer puts down $10,000, the bank loans $50,000 and the seller finances the remaining $40,000. The seller will have a mortgage note (Deed of Trust) for $40,000 with an agreed interest rate.

In this example the buyer does not have to worry about the seller defaulting on the first loan since it is in the buyer’s name.

If you still have questions contact us at 877homes@gmail.com