Although many people are unfamiliar with it, owner-financed loans and the use of mortgages has been around for hundreds of years. In fact, they’re so old, they’ve actually been around longer than credit cards! Most people are also familiar with how banks lend money to purchase homes or buildings. However, banks aren’t typically part of the transaction. Rather, the lender (the homeowner) finances the entire amount himself. He does this through a mortgage company who then sells the home to him. A lawyer, an appraisal, and a title company are often part of the transaction.
Let’s say Barb wants to purchase a property from Joe. She might decide to use an ownership mortgage because she believes that owning her own property is better
- They’re afraid of banks.
- Barbara may not be able to get a mortgage because her credit rating isn’t good enough.
- The building would not conform to bank requirements
- They want to close quickly.
- Because of financial reasons, Joe wants to sell his house with an option to buy at a later date.
Joe and Barb agree on a sale agreement of $200,000. She puts in a 20% down-payments of $40,000. They decide to do a loan modification where she pays off the remaining 80% of the loan amount over 15 years. Joe agrees to a 4% interest per year and Barb agrees to pay $1331.44 a month. With these changes, they both feel comfortable about the deal. The lawyer drafts the modified contract and sends it to the bank. He also includes the original contract so that the bank knows that the modifications were made voluntarily and not because of any problems with the loan. The bank approves the loan modification.
As a note holder, one advantage of buying an investment property through an investor is that you don’t have to pay any cash up front.
- Steady income
- There may be tax advantages
- Avoids the expense, trouble, and hassles of using banks
The disadvantages are:
- If you’re going to take out a loan for $100,000, you’d better be sure that the person who lends you the
- You need to ensure that property tax and homeowners’ insurances are kept up-to‑dated, and that you’re listed as the mortgagee on his/her homeowner’s policies.
- You may want to make sure that if there ever comes a time when you need to foreclose on the house, that it is well maintained.
- May be additional monthly costs if using a service provider
There are both positive and negative aspects for the new owner of the house when buying a foreclosure.
- Avoids the hassles and expenses of dealing with banks
- The note holder may accept payment later than usual if they’re willing to take a chance.
- Avoids PMI
The disadvantages include:
- Late or missed payment may hurt your FICO score, but late or missed payment doesn’t necessarily mean you won’t be able to get a loan again.
- The note holder might not care for or even be aware of the property owner’s legal responsibilities.
As mentioned earlier, if Joe decides to take out another loan, he must pay off the old one before taking out the new one. If Joe does not do so, his lender can foreclose on him and seize any assets he owns. In order to protect himself against such an eventuality, Joe should try to raise enough money to cover both loans. He could also ask his friends and family members to help him out.
Let’s say that John has received twelve on-time payments, putting the unpaid amount at $171,000.02. To purchase the remainder of the loan, the bank offering the loan pays off the outstanding debt, providing a 6 percent interest rate. The bank also covers all expenses associated with purchasing the loan, including an appraiser, title insurance, and preparing the paperwork needed to transfer ownership. John accepts the offer, and forwards copies of requested items, like the promissory notes, closing statements, and proof of payments, to the lender.
- The note buyer orders an inspection of the property from a local, independent inspector. It usually takes one to two weeks.
- After the appraiser has completed his/her inspection, the buyer requests a preliminary report from an independent insurance agency. This usually takes a couple of days.
- The assignments are returned by Joe to the note buyers who then sign and return them.
- After receiving the signed document, within one business night, the funds are transferred to Joe.
Hopefully, the above explanation will help you to better comprehend the concept of owner financing and the various steps involved in the sale of a note. If you need additional information or if you have any questions, please don’t hesitate to contact us.
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