How to Owner Finance a Home – 8 Steps to Think About

[Joseph Scorese]

How to Owner Finance a Home – 8 Steps to Think About

1.Get an appraisal or broker’s price opinion from a Realtor (BPO) to determine the price of the home. Both the buyer and the seller can hire their own appraiser or Realtor to determine value. The seller receives an appraisal in order to select a price for the home, and the buyer gets one to confirm that the selling price is fair.

1. Partner with a Residential Mortgage Loan Originator (RMLO) and real estate attorney to assist in creating the home-owner financing paperwork. A Residential Mortgage Loan Originator will not only provide the seller/lender with information so that he can make and educated lending decision but it will provide the buyer/borrower with a transparent transaction limiting future issues. The RMLO can help prepare a Safe Act and Dodd Frank Act compliant loan package in conjunction with the Title Company or closing attorney. Both parties can commission their own attorney or use a Realtor to draft a sale agreement. This paperwork should include the agreed upon price, the terms of the loan, the interest rate and the payback schedule. The buyer can include a protection clause just in case the property has to be sold in response to a life changing event, job relocation or loss, divorce or death. More questions...[www.OwnerFinanceDisclosures.com]
2. Establish a plan in the event of default, foreclosure or forfeiture of the home. Have your RMLO or Attorney partner create your states required Note, Deed of Trust, Mortgage etc. to protect your position and stay within the state rules. Research your options and ensure that you are not caught off guard in these instances.
3. Consider background checks to determine the risk of your owner financing transaction. By partnering with a Residential Mortgage Loan Originator (RMLO) the seller can assess the buyer's finances and credit scores. This can be an assurance to the seller should the buyer intend on refinancing to a traditional loan at the end if the contracted term. The buyer can also benefit from a background check, especially if the seller's finances show a lack of responsibility. Note that if the seller still holds a mortgage on the home, there is a risk of default, using a licensed loan servicing company will limit the likelihood of this happening.
4. Discuss a fair down payment and interest rate with your RMLO or attorney. The seller does have control over the details of the owner financing, and since the risk is primarily on this end of the contract, the seller should request a substantial (usually 10%) down payment. Additionally, since the seller is not a bank or large lender, the interest rate on an owner financed mortgage is usually higher.
5. Agree on an interest rate and term with the buyer. Your RMLO partner will calculate the agreed upon amount based on a specific period of time and if you have agreed on a balloon payment or not. For example, base monthly payment amount on a hypothetical 30 year mortgage, but schedule payment of the remaining amount in 5 years (balloon). The RMLO will also create required disclosures for the seller/lender.
6. Decide if you, as the seller, want to hire a loan servicer to manage payments. A loan servicer not only collects the mortgage payments, but the service usually includes setting up an escrow and taking care of tax statements, keeping taxes and insurance payments up to date, processing payment changes and collection services too.
7. Ensure that the contract between parties is recorded legally. Doing so will allow the buyer and the seller to take advantage of tax deductions. Making the deal official in this manner also proves that the sale took place.