Changes to the rules and regulations governing the housing market have led sellers to offer alternative means of financing in order to compete in a market saturated with homes for sale. Looking to attract buyers who can't qualify for a mortgage loan, motivated sellers are frequently offering the non-traditional option of owner-financing. This alternative financing method has disadvantages for both buyers and sellers; however, sellers assume a greater amount of risk than the buyer.
A favorable credit history and decent credit score are factors a lender analyzes in a mortgage loan application review. If a buyer has a credit history that precludes him from qualifying for a mortgage, he may seek a motivated seller interested in carrying the mortgage. While owner-financing may allow the buyer to purchase a home, his credit rating will not benefit from timely mortgage payments. Only lenders who meet all legal requirements and maintain a contract for credit reporting are able to report accounts to the credit bureaus.
A buyer should not expect to receive the same interest rate on an owner-financed mortgage as he would if he qualified for a traditional mortgage loan. A seller who is willing to provide this type of non-traditional financing will most likely expect a reasonable return on investment to make the transaction worthwhile. Generally, a seller may charge any interest rate agreed upon by all parties to the transaction, provided the rate does not violate any applicable usury laws.
From a seller’s perspective, carrying the mortgage means the home has sold, but the money is still tied up in the real estate. The seller receives proceeds from the sale over the course of time, as the buyer makes monthly payments; however, the seller becomes responsible for servicing the loan. The seller must collect monthly payments, maintain adequate loan records, ensure property taxes are paid timely, and monitor for sufficient hazard and flood insurance coverage.
A seller’s greatest risk is that the buyer stops making payments on the mortgage, which may result in a lengthy and costly foreclosure action. Several laws govern the foreclosure process, each varying by state, and the holder of a defaulted owner-financed loan is required to follow the laws, just like any other lender. It may be necessary to hire an attorney to complete the foreclosure process, to ensure all applicable laws are being followed correctly.
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