What is it involve in an owner financing, this is my first one

[Dee Xixi]

I am closing on my first Owner Financing, all you that I have done it before please tell me how to handle the process. The owner accept my offer so what come next?

[Bill Gulley]

Hi, On the buyer's side you should do some due diligence as to who you are dealing with. If the property is not the seller's primary residence and is an investment property, you need to do some checking.

First, check the seler's name in the real estate records where the property is located. What you are looking for is any tranfer of deeds to or from the seller. If you find that the property you're buying has been foreclosed upon or a quit claim deed has been filed, this is a red flag. It may indicate that the seller is a "churner" who sells property for the down payments, accepts payments over a term and then declares default and takes the property back. They set up borrowers for failure. If this has been the case, you can continue in the deal, but you need to protect yourself.

Even if this is an arm's length transaction, following this advice will make the deal much safer for you.

Go to a bank or a mortgage broker and have them pull a credit report. Have them pre-qualify you for a mortgage on the property. What you need to know is if you would qualify and if not, what you need to do to qualify. If you have credit problems you need to know exactly what to do to cure the problems, raise your score as necessary to qualify in the future. You need to know how long it will reasonably take to qualify for a mortgage, when you know this, then you are ready to deal on the terms of the seller financed loan. Any balloon payment under the seller financed note must be after the date, like 6 months after, the balloon payment will be required. Otherwise, you will be required to payoff the loan and you may not qualify which will require you to sell the home or be foreclosed upon.

Next are the terms of the promissory note. Even if you would qualify for a loan make sure the term is sufficient before any payoff requirement, at least three years. Three to five years is better. The amoritization is the length of time payments are scheduled to fully repay the obligation. Seller financing usually uses a 30 year amoritization period, but 20 or 15 years is customary as well. The shorter the period the more your payment will be and the quicker the principal will be reduced.

Interest rates will vary widely but check in Mass. for a "usury law" which is a interest rate limit that can be charged by the seller. Right now, you might be looking at 6 to 10 per cent. You need to negotiate the rate as you do the price. If you plan on keeping the property for a short period, you can ask for a lower price and give a higher rate, that has worked before.
Next make sure there is no pre-payment penalty, a charge made by the seller in the event you make additional payments to principal or payoff the loan early. Many sellers will charge a pre-payment penalty equal to their tax liability, which means you'll be paying the gains on the sale for them, know what that amount would be and if you're paying close to market rate for the property, I suggest you not to the deal unless they change the penalty. People die, get divorced and things happen in life that may require you to sell the house or pay it off and your profit could go to pay their taxes!
These are terms of the promissory note that are important, but here is the most important aspect. Servicing the loan.
Servicing a loan is the administration for payments, taxes, insurance and the security agreement. If the seller's name poped up as having sold the property before, you must insist on the loan being serviced by a third party! Regardless, you should insist on it. This means you will be sending your payments to a third party and they will eiother advance funds or forward fund to the seller. The servicer will ensure that any other underlying moretgage is paid if the deal is a sub-2 transaction. They will pay the taxes as due if you include escrows in your payment as a bank would. They also take care of tax requirements and calculate interest paid and earned and can provide you with proper payoffs if necessary..
Not using a servicer is dangerous. A seller can simply not deposit your payments in a timely manner and you will not have proof of timely payments for your credit to be established or shown as necessary for any future loan. The seller can manipulate payments so that the borrower will not qusalify in the future, causing a default.
There will be a deed of trust in Mass. This appoints a trustee to provide you with a deed of release, which releases the collateral interest when the note is fully paid. You will be "in title" to the property but the deed of trust provides a security interest in the property to the lender. The trustee is also responsible to act in the event of default and sell the property through a foreclosure sale if necessary. Make sure the deed of trust and or promissory note require a notice of demand for payment at least thirty days prior to any notice of demand for the payoff or acceleration of the note to its maturity. The security agreement will also allow the lender to advance funds to pay any encumbrance or lien as well as unpaid taxes and insurance and these amounts will become part of the principal bearing interest until fully paid. These issues may be a default, but may or may not be cause for accelerating the note to maturity as would be the case if you missed payments. Such advances can also have penalties and be very expensive. If you have a servicer and you escrow for such expenses, you nor the seller will have to worry about it.
The closing agent will require you to sign the note and deed of trust and the seller will execute a general warranty deed, the closer will explain the deeds and related documents at settlement.
Servicing can cost as little as $15.00 a month and is well worth it, as for a new note, the borrower generally pays servicing costs. It's the best insurance your deal will go smoothly you can get!
This is just the basics.
Good Luck, and Follow Me, Bill