Owner Financing Contract

If you don't have the cash or the down payment to buy your new home, then you can consider owner financing contract. Read on to understand various aspects related to it.
WealthHow Staff
Last Updated: Jun 22, 2018
When planning of buying a home, there are several options you can go through and owner financing contract is one of them. This can be an excellent alternative if you can't or don't qualify for a traditional mortgage. Your credit score may be on the lower side, may be due to late payments or even bankruptcy thereby making you ineligible for a loan.
However, if you go for this contract, you don't need to think of qualifying; besides, you get a flexible option. You as the buyer have to enter into an agreement with the seller, wherein you will have to pay a specified amount to him as a down payment. After that, you need to pay a predetermined amount each month, along with its interest.
Once all the payments have been made, the owner of the property gives the deed of the property to you. During its term, you can possess the property, but you may need to pay all the taxes applicable. It's not only for a home that you can go for this option but also in case you want to buy land.
Owner Financing Land Contract
When you think of buying land, you can also consider this option. Financing is provided by the owner and a purchase price is agreed upon. The buyer, in turn, pays a certain amount each month as an installment. When the contract is signed, the legal title of the property is retained by the seller, and the buyer can use the land for any purpose he wishes.
Each month, the buyer pays an agreed upon amount as an installment towards the sale price of the property. Towards the end of a predetermined period, a balloon payment may be paid by the buyer. When the whole amount is paid, which may include interest, the legal title of the property is given to the buyer.
Many times, you may need to make a down payment, after which the installments are paid, but it's usually up to the owner and the buyer.
Agreement
While signing this contract, you need to go through the terms and conditions carefully. You will have several clauses, wherein the amount you need to pay each month would be mentioned. There may also be sections, wherein taxes that may be applicable needs to be paid by you.
In case you can't pay the specified amount in one of the months, the fees applicable would be mentioned, besides the applicable interest rate. There would also be sections, which would mention what would happen in case the buyer or seller fails to honor the agreement, and the penalties applicable.
One of the main advantages of going for this alternative is that, even if you can't afford a traditional loan, you can go for this. During its period, you have the option of improving your credit score, and then applying for a loan from a bank.
Moreover, there may be no or very less closing costs involved, in comparison to traditional loans. For the seller, it's a good option as it not only provides him with a chance to sell the property but also a steady income, even though it's for a specified period.
The main disadvantage of the contract is if the seller finances you only for a short period you may need to apply for a refinance loan at the end of the term. If you are refused a loan, you may find it difficult to pay the seller. Other than this, you can also look at lease purchase homes, but go through the terms and conditions first.
Thus, all in all, it is an excellent option if you want to buy a house but don't have enough cash with you. However, make sure that you research and consider all the factors before signing anything.