Selling Your Louisville Home - Owner Financing
What is Owner Financing?
Owner financing is when an owner finances a real estate purchase for a buyer, which can only be done if the owner owns the home free and clear. A seller may consider this option when a buyer has difficulty qualifying for a conventional loan. Unlike traditional financing, the owner does not give the buyer cash to complete the purchase, unlike a lender does. Owner financing involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the favor of the seller. The title or escrow company will prepare the necessary paperwork after the terms are worked out between the buyer and seller.
If you are a seller considering such an arrangement, it is critical that you first thoroughly evaluate the creditworthiness of the buyer. If a traditional lender determines there is too much risk in lending the buyer money, you're likely to determine the same. Fear of default wisely makes many sellers reluctant to carry the mortgage.
How are the Rates Set for Owner Financing?
The interest rate is negotiable between the seller and buyer on an owner-carried loan. You may want to ask your Louisville Realtor to check with a lender to determine the current rate on mortgage first (or second) loans. Owner financing could cost the buyer less than conventional financing because owners don't charge points (loan fees). The rates are also influenced by the current Treasury bill and certificate of deposit rates on an owner-carried loan. It would not be likely for a seller to agree to carry a loan that would generate a lower return than they would earn if their money was invested elsewhere.
What are the Benefits of Seller Financing?
Be sure to check with your accountant regarding potential tax breaks offered for owners. Owner financing can be helpful for a buyer that can't qualify for traditional financing. The risks a owner faces are the same that a lender would face. A couple of factors you would want to consider are if the buyer is a good credit risk and if the property will hold enough value over time to allow for the new debt. Among other things, the seller should run a full credit check on the buyer, require property hazard insurance, and include a due-on-sale clause. Consulting with an attorney before entering into a legally binding contract would be wise. Owner financing can be risky. As an experienced Louisville Realtor, I typically discourage owner financing.
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