Owner Financing Tips How to Offer Owner Financing Safely

Owner Financing Tips: How to Offer Owner Financing Safely

As an owner of real estate, you may be considering offering owner financing as an option to prospective buyers who may be having difficulty getting approved by traditional lenders. After all, as long as your buyer has solid income and credit, you can usually work out terms that are mutually beneficial – you get paid up front, the buyer doesn’t have to deal with any hassle from a lender, and both parties can save money on taxes and costs associated with a more traditional mortgage setup. If you’re thinking about offering owner financing, read on for some of the most important tips on how to offer owner financing safely the right way.

Require a large down payment for owner financing

When you’re offering a seller financed loan, it’s a good idea to require a large down payment upfront (at least 20%) and secure your investment with a mortgage lien. This way, if buyers default on their payments or miss too many of them, you can take back possession of your property and qualify other buyers to owner finance. If you are ready to cash out, you can put the house on the market to sell.

A word of advice – the point of owner financing is to offer options to buyers who may have trouble getting a conventional loan for many reasons including lack of down payment funds.  Later in this article, we’ll discuss what you can do for buyers who lack those funds.

Ask for other security

Owner Financing Tips: How to Offer Owner Financing Safely Secured with Assets
Owner Financing Tips: How to Offer Owner Financing Safely Secured with Assets

Although private seller financing can be a safe and attractive option for buyers, it does carry some inherent risks. If you plan on offering an owner financed loan, make sure you ask for other security—like property title or a lien against another asset—to ensure that your investment will remain secure. After all, you’re still putting yourself at risk if something goes wrong with your borrower’s finances or property rights.

Get credit checks before approving owner financing

A critical first step in offering seller financing is getting credit checks on prospective buyers. Make sure you have a clear understanding of how your potential buyer makes their income, what types of bills they have and how often they pay them, and whether or not they’ve filed for bankruptcy. Understanding these things will help you decide what type of owner financing terms—i.e., interest rate, down payment requirement, length of loan—will work best for your situation.

Don’t ignore your instincts

Owner Financing Tips How to Offer Owner Financing Safely. Don't Ignore Your Instincts
Owner Financing Tips How to Offer Owner Financing Safely. Don’t Ignore Your Instincts

When offering seller financing, it’s important to follow your gut. You might be tempted by an attractive offer, but is something about it too good to be true? If you sense that something could go wrong with a deal, don’t ignore your instinct. Seller financing is supposed to make both parties happy; if you sense that it won’t, consider walking away. 

See the financial big picture

As mentioned previously, owner financing can help buyers who may have trouble getting a conventional loan due to lack of down payment funds.  One option for owner financing is to assist the buyer with a seller carry back loan for all or part of the down payment required by the bank.  Not only does this allow the buyer to be able to get a loan to buy the home, but you get cash up front from the sale and can charge interest on the second loan.  The downside is that if the buyer defaults, the bank’s loan will be in first position.  What does this mean?  The bank must be paid off first in the event of any foreclosure and subsequent sale.  There may not be enough proceeds to get your money back.  

Involve a lawyer

When you’re setting up your seller financed mortgage, it’s crucial that you get legal advice. Once you have your contract drafted, don’t just settle for any lawyer who can review it—find someone with experience in seller financing. Not only will they know what kind of risks are involved, but they’ll also know what changes to recommend so that you don’t trip yourself up while working out a contract.

Owner financing in conclusion

You may think owner financing is an easy option, but it comes with its own set of challenges. Make sure you are offering seller financing safely by following these tips. Be sure to double-check your property before offering owner financing. Assess your financial situation and consider hiring a real estate attorney for added support. Follow these tips to help your owner financed home sale go smoothly and without a hitch!

If you found this article helpful, please share our website and visit often to receive more tips, information, or news to help you achieve success in all your real estate needs!