How to Do Owner Financing and the Eleven Rules You Must NOT Break to Protect You from Buyer Default

Offering owner financing can help you to broaden your base of the potential buyers and may help you to sell your home fast in a buyer’s market. You can offer seller financing on your home in a number of ways. You can do 100% owner financing or partial owner financing depending on your financial situations and existing loan balance.
 
In 100% seller financing, you finance the entire amount of the sale price. You will not receive your entire proceed of the sales until the buyer’s loan is paid off. You can do 100% financing whether you own a house free and clear or a house with an existing loan.
In partial seller financing, you finance some amount of agreed certain percentage of the sale price, you will not receive that portion of the sale proceeds until the buyer pays off the total amount you financed.
 
However, if you need cash now, you can also sell the mortgage note to other investors at a discount and cash out.

Then, what are the advantages to do owner financing?

 
Advantages for sellers by owner financing are:
1.   You can have a broaden base of potential buyers;
By offering owner financing, you either sell your house to buyers if he can get a mortgage loan from a lender through cash closing, or to buyers if he cannot get a loan.
 
2.   You can turn yourself as a banker and make very handsome return on your money.
You can always charge a higher interest rate than any mortgage lender. If your home currently carries a low interest rate loan and the current mortgage interest rate is higher, that will be a great advantage to you. For example, if the interest rate of your existing mortgage is 6.0% and the current interest rate is 6.5%, you can charge the buyer at least 6.7% or even higher interest rate depending on the buyer’s credit scores. You are the banker now, and you decide your rate. The money from the difference between the 6.0% you paid and 6.7% you got from the buyer belongs to your pocket. Or if you own a home free and clear, that is even better. Let’s say the current mortgage interest rate is still 6.5% APR. You can charge the buyer at least 6.7% APR or even higher for the entire home sale price, which is much better rate than a CD.
 
3.   You may also be able to get a better price than the traditional non-owner financing.
Since you offer owner financing, you are in better position to negotiate the price. Especially when you offer 100% financing, you are not only helping the buyer who could not get a mortgage loan, but also save the buyer’s money on financing costs.
 
     4. Can close quickly.
 
The disadvantage to you as seller is the risk of buyer default. You must have ways to protect you from buyer default. At the end of this article, I will give you the 11 rules you must obey to protect you from default.
 
Advantages for Buyers by owner financing are:
1.   No needs to work with a [tag-tec]mortgage lender[tag-tec].
2.  Saving money on the costs of the financing.
3.  Lower rate and lower payments
4.  Doesn't show on buyer's credit report
5.  Flexibility
6.  No personal liability when using trust
7. Can close quickly.
 
 
How to do the owner financing?
Here are the steps you can take:
 
1.   Step one:
Pre-qualify the buyer: Set some criteria to prescreen your buyers. Ask the potential buyer questions to if the buyer has enough income and good credit score. The better credit scores the better buyer. Ask if the buyer has a stable job with good income, and any other properties that can be used as collateral. If the buyers do not pass your prescreening, don’t waste your time on them.
2.   Step two:
Reach agreement with the buyers to the sale price.
3.   Step three:
Once the agreement is reached on sale price, ask your buyers to authorize you or a mortgage broker to check their credit scores and verify the incomes, and collateral properties if applicable. Asking the buyers to fill out an application form with buyer’s social security number and contact information on it can do this. On the form, make sure to ask buyers to write a sentence to authorize you or your agent to check all the information described above.
4.   Step four:
1) Ask the mortgage broker what mortgage interest rate the buyers can get based on the information from Step 3.
2) Determine the interest rate and term of the loan you would like to have.
3) Reach an agreement with buyers on the interest rate and length of the loan.
5.   Step five:
Calculate the mortgage payments. This is can be done easily by using online mortgage calculators.
6.   Step six.
Sign a purchase and sales agreement
7. Step seven:
Close the transaction with a real estate attorney or a title company. Make sure you have complete clauses in the agreement to protect you.
 
Warnings:
 
The main risk is buyers' default on payments. Size of their down, value of the collateral properties, and the their ability to pay are you only insurance against default.  So here are the rules you must obey to protect you, or you will get hurt.
 
The Eleven Rules You Must not Break to Protect You from Buyer Default.
 
1. Never do 100% financing if buyers don't put some properties as collateral.
2. Make sure buyers have enough income to pay you as agreed.
3. If you are doing partial owner financing, ask for sizable down payment for at least 10%.
4. Have a collection clause in your agreement.
5. Have a late penalty clause in your agreement.
6. Have a due on sale clause in the mortgage.
7. Have buyers sign the agreement personally.
8. Deed in escrow.
9. Always, always ask an experienced real estate attorney to set up the agreement and the mortgage for you.
10. Sell the promissory note to other investors at a discount for cash. There are a lot of investors who buy mortgage notes. This can be done at the closing or later.
11. The last avenue is to foreclose the property and take it back.
 
Never violate above rules! Or the punishment will be very very severe. Always consult a good real estate attorney before you do owner financing!

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