owner financing a good option for bad credit?
Filed in Renting & Real Estate on May.16, 2008
Is owner financing really a good option for those with bad credit? What are the typical qualifying terms in these cases? Is documentation usually required? What’s the best way to structure the deal, in the buyer’s favor?
If you have any tips or insights, please share.
By: merebear83
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May 17th, 2008 at 11:09 pm
Owner financing is a great option for bad credit. Especially during times like these when traditional credit is tightening up. There are many ways to structure the deals. Sometimes a portion of the rent goes towards the down payment for about 3-5 years. At that time the credit will (hopefully) be better, and the “renter can get a traditional loan.” There is also a “nest egg” to put towards the down payment.
There is also a method called the “wrap-around” mortgage. For example, the seller sells you the property for $100,000, on a 30-year term. He owes $50,000. You pay him $1000 per month. He pays the mortage company $500 and keeps the other $500. When you pay off the mortgage you own the home.
When structuring these kinds of deals, make sure that it is clearly stated that this is a “Purchase” and not a “rent to own.” Ideally you should have a recorded deed, but be careful with that because once a deed is recorded the lender might have the option to “call” the entire loan balance due. If the deal is structured in your favor, the sales price is locked in and the seller can’t change it. Make sure that you have the right to sell the property as long as you pay off whatever price you agreed upon. In my example above — if the property is worth $120,000 after 3 years, you would have the right to pay off the entire $100,000 and keep $20,000 for yourself.
Above all, please consult an attorney to look after your interest.
May 20th, 2008 at 9:49 am
Amongst the types of owner financing that I am aware of, nothing is really beneficial except for a seller take back mortgage which is usually only done if a buyer can’t get enough money from a lender and the seller provides a small second mortgage to get the deal done. I believe a contract for deed is not in the best interest of the buyer because you don’t take title to the property until the full amount of the purchase price is paid thus you don’t get any tax benefits and you don’t possess any sale-able equity at any time until the end. A lease option can be a good thing if you are able to negotiate a good sale price because the sale price stays the same when you are able to get conventional financing at the end of the lease term while it may be worth considerably more (instant equity).
The best way to structure a lease option is to negotiate a low sale price, get a long lease term and a low deposit. But don’t go into it blindly and treat it as if you were pre-approved by doing a home inspection such that you won’t run into any surprises when you are ready to follow through on the sale.
May 21st, 2008 at 11:26 am
If the instrument used to establish this purchase is a Contract For Deed, then yes, it is a very good option.
Basically, a contract for deed is an agreement between a seller and a buyer directly, without a bank involved. The seller will usually offer a 2 year contract with a balloon payment at the end of that 2 year period. This gives the buyer time to establish and/or repair their credit so that by the end of the contract term, they can qualify for a regular mortgage.
Most Contract for Deeds are 2 to 5 years in length. The seller and buyer determine the interest rate, down payment, monthly payment amount, and final balloon payment amount and date.
There are some words of caution though… Make sure you really can afford it – including the utilities, maintenance, taxes, insurance, and other costs associated with owning a home.
If you default on a contract for deed, you only have 30 days and then you are out. If you default, you lose what you’ve put into it to that point and have no legal recourse for re-couping any losses.
There are other arrangement that are generally called “rent to own” or “lease to own” but be very very careful of these. Many states do not have laws sufficient to cover the wide range of circumstances that can occur. This type of arrangement blurs the lines in the relationship. Are you really renting or buying? Is the building owner the seller or your landlord? Tenant / Landlord law is very specific and there can be many legal problems. If you are “renting to own” and the seller / landlord lets the property go into foreclosure, then what happens? Who is responsible to maintain the condition of the property while you are “renting to own”?
Stick with the traditional Contract for Deed and you should be OK.