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When you’re buying a home, going through a bank or credit union is usually a necessary evil. In rare cases, you might qualify for owner financing, where you make your payments directly to the home seller. Here’s why this type of financing is uncommon, and what you can do to get it.
In ordinary cases, owner financing is difficult or impossible for two reasons. First, sellers must pay off their mortgage. In the case of a $200,000 house with $120,000 left on the mortgage, a seller needs $120,000 readily accessible. Not likely, right?
The second reason is most sellers want their money right away. Few folks are willing to accept monthly amounts spread across 10, 15 or 30 years. Heck, sellers who are older than 40 might never see all the payments.
Some sellers do not need large amounts of money right away. In fact, they see owner financing as a guaranteed investment — which it is. Putting a similar amount of money in stocks could lead to significant losses or even a total wipeout. Owner financing brings much more peace of mind, and sellers can charge higher interest rates than banks do. The only risk to the seller isn’t much of a risk in the big picture. If a buyer stops making payments, the seller takes the house back and sells it again.
If you’re a buyer and don’t want to — or can’t — finance through traditional means, you can do a few things to help your chances of getting owner financing. Agree to pay an interest rate higher than what a bank or credit union would charge. The monthly payments may be hefty, but a couple of years later, you could be in a position to qualify for a bank loan.
Another tactic is to suggest partial financing. This is particularly useful when you have a bank loan but fall short of the last chunk of money you need. You must be willing to pay high interest, maybe even two times the current rate. As with full owner financing, your situation could improve in a few years, allowing you to switch the loan to a bank or credit union.
As you may have gathered, owner financing can help you get the house of your dreams. However, you could be better off using it only if your financial situation stands to improve in the next few years. It can definitely make sense, though, especially if you’re paying sky-high rent.