It can be difficult to obtain a mortgage if your credit isn’t in great shape — but a different financing option could come to your rescue. You may be able to bypass the bank entirely by seeking out owner-financed homes. (Related terms you might see include seller financing, seller carry-back financing, and purchase-money mortgages.) So, what are owner-financed homes, and how can you get one? Read on to find out.
What Are Owner-Financed Homes?
Owner-financed homes are homes sold and financed by the original owner of the home. That means the owner selects the buyer they want to work with and sets the terms of the deal. It’s then up to the buyer to agree or negotiate the deal. Once the deal is done, a promissory note is signed and the buyer pays the original owner, not a bank, for the home each month.
In other words, the owner is the creditor for an owner-financed home, not a bank. That said, you could obtain a loan to cover part of the cost of the home and ask the owner to finance the rest, in which case you would owe both the bank and the owner.
If you have bad credit and are unable to be approved for a mortgage, this type of financing offers a chance for you to get into a home that you might not otherwise have had. You might end up paying higher interest rates than average for this, but if your goal is to stop renting and you don’t have other options, you might consider that a worthwhile risk to take on. What’s more, this type of financing means you wouldn’t have to pay as much in closing and other fees as you would financing through a bank.
You might be able to save on a down payment, too. Depending on the owner, you might be able to put less than 20 percent down, which can help you get into a home faster and potentially even keep more cash in your pocket for emergencies.
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How an Owner-Financed Home Deal Works
Unlike a traditional mortgage, you’re not likely to get a deal for a 30-year payoff. Rather, the owner might offer you a loan for a shorter term, such as five years, after which you might have to pay the balance in what’s called a balloon payment. The goal in that situation would be to have improved your credit enough in the meantime to be able to get a loan through a traditional lender to refinance the home and cover that balloon payment. At that point, you and the owner would officially part ways, and you’d pay your lender only.
That doesn’t mean the loan will always end in a balloon payment, however. State laws and restrictions on the owner could determine if balloon payments are even allowed, and you might find an owner who’s willing to create a loan with terms long enough to have the home paid off by the end.
How to Get an Owner-Financed Home
Although owner-financed homes aren’t common, you can find them the same way you’d find any other home. Real estate listing sites such as Trulia, Zillow, and public MLS (multiple listing sites) enable you to search for homes with these criteria. You can also talk to your real estate agent to see if they know of any such homes in your community.
If you partake in such a deal, it might not be a bad idea to contact a real estate attorney to double-check the details of the deal and even help you prepare the paperwork to make sure you’re not entering into a potentially bad situation.