Many people who want to buy a home at today's low, low prices are still having difficulty qualifying for traditional bank loans. More than ever before, banks are requiring high down payments and high credit scores in order to approve a loan application. This is causing thousands of loan applicants to be denied from 'good' potential buyers who don't make the grade of the bank's 'perfect' buyers. Where can good people who are motivated home buyers turn to purchase a home anymore? The answer is owner financed homes.
There's no denying the tremendous interest in alternative home purchase financing. Although rent to own homes are a great concept, owner financed home sales are quickly becoming the preferred alternative to bank financing. The number of homes for sale with owner financing available is growing rapidly. Listings with "owner financing available" already exceeds rent-to-own listings almost 2 to 1. The growth in popularity is because owner financed homes solve the same issue as rent to own homes, that is, they allow the buyer to avoid traditional bank loans, and they do it better.
Owner financed homes go one step further than rent-to-owns because they avoid the lease option process and rental term. Instead, owner financed homes allow the home buyer to purchase right away. Since owner financing is more flexible than bank loans, home purchases can be negotiated with low down payments, affordable monthly payments and allow for varying credit levels.
In general, owner financed home sales are taking one of three forms:
1. 100 % financing
2. Short-term financing
3. Shared ownership
With number one, 100% owner financing, the home owner acts as a private lender to the buyer. The seller loans all the money necessary for the buyer to purchase the home with a long term payback plan. This is very much like a traditional bank loan mortgage, but the buyer is dealing with a private party for the loan instead. The private party seller can offer various down payment and monthly payment options to match the buyer's needs and credit standing. These arrangements can last as long as the seller is willing to extend their owner financing terms. These terms can be shorter or longer than a traditional 30-year bank mortgage.
Short-term financing (number 2) is typically used for a 3 to 5 year period. In these cases, the owner is willing to finance the purchase and have the buyer move in. After making payments for the owner financed home for several years, these situations usually include a balloon payment for the balance of the purchase. When the balloon payment is due, the home buyer can re-finance the purchase with another private lender or a bank mortgage.
Shared ownership is another form of owner financing, though it is not used as frequently. But for those cases where it works well, the seller retains a partial ownership in the home. The buyer pays a low payment for their partial ownership. If the buyer decides to move and wants to sell the home, both the home occupant and the original seller would share in any sales profits based on their shared ownership. For instance, if the owner financed a 40% purchase to the buyer, the buyer would enjoy 40% of any future profits when selling the house.
Regardless of which approach is used, owner financing will continue to grow in popularity as more buyers discover the benefits of buying direct and finding their pathway to homeownership without needing a bank loan to get started.