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Is Owner Financing a Good Idea When Buying a Home? Five Ways to Get Your Best Deal

Posted by  on Oct 08, 2009
 

Hi Toby,

Owner financing has a few pros and cons. It can be a good option if the purchase is handled professionally, but keep in mind that sometimes there is a reason the home is offered with owner financing. The seller may want to avoid the oversight that mortgage lenders typically require when financing property--things like inspections, appraisals, and legal purchase agreements. Follow these five steps to avoid a bad deal.

1. Make sure that your agreement has an appraisal clause--so if the property doesn't appraise for at least the sales price, you are not obligated to complete the purchase. Buyers who skip paying for an appraisal because there isn't a lender requiring it may substantially overpay for a property just because the financing was easy.

2. Use a standard purchase and sales contract, especially if no real estate agent is involved. If you have to pay a real estate attorney a couple hundred dollars to draw one up, do it. It is well worth the cost.

3. Look carefully at the loan terms and mortgage interest rate being offered. Can pre-payments be made? Is there a balloon payment at the end? This latter feature means the payments are based on a 30-year amortization but the owner wants the remainder of the balance in, say, five years. Who is going to record the mortgage? What interest rate and fees are involved?

4. Compare lenders' best mortgage rates to the owner financing being offered. In many cases, owner financing is chosen because the buyer does not qualify for VA, FHA, or conventional financing. Eliminate those possibilities first--it's easy to get mortgage interest quotes online, and many lenders underwrite electronically. You may know in minutes if you qualify for traditional financing routes or not.

5. Get a home inspection, no matter who is doing the financing. Finding out after you have closed on the sale is an expensive way to discover leaky roofing or bad pipes. If these things come up in an inspection, you have the option of asking the seller to fix them, getting a lower price, or walking away. Those choices disappear once you have waived your rights and bought the home.

Owner financing can save you money and get you into a home with fewer hassles, especially if you have bad credit. It is not always a bad choice. Just do your homework and protect yourself before any notes and mortgages are signed.

Liz



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