Many homeowners with property for sale are struggling to locate qualified buyers. Tightened lending criteria has made it difficult for many people who want to buy houses to qualify for home mortgage loans. Competition with low-cost bank owned homes has made it challenging to find buyers willing to pay current market value.
To obtain the asking price for property for sale, many sellers are offering creative financing strategies to attract buyers who cannot qualify for bank loans. These include owner will carry, lease purchase option agreements, and subject 2.
Entering into unconventional financing allows homeowners to generate cash flow from their property and gives borrowers the chance to improve credit scores while working toward purchasing a home.
Owner will carry involves the seller acting as the lender. Buyers provide a down payment to secure the property and submit monthly payments which are contributed toward the purchase price. A few options exist when entering into this type of agreement.
The first involves having the owner finance the full amount for 2 to 3 years. A real estate contract is executed by a lawyer which outlines the purchase price, interest rate, payment amount and due date, late payment fees, down payment amount, and a default clause.
Buyers must engage in credit repair strategies during the owner-finance contract period in order to qualify for a home mortgage loan when contract terms expire. Since there is no guarantee that buyers will be able to obtain bank financing, the contract should include legalese to address what measures will be taken if buyers cannot qualify for a home loan.
The second type of owner financing involves seller carry back mortgages. This can encompass sellers’ carrying full or partial financing. In most cases, sellers only carry back a portion of the purchase price and buyers obtain a bank loan for the balance. When sellers carry back part of the purchase price, buyers require less funding which makes it easier to qualify for bank financing.
When partial financing is offered, seller carry back mortgages usually extend for 2 to 5 years. Buyers hold two mortgages against the property. The bank is the first lien holder and the seller carries the second mortgage. A real estate contract must be executed to record loan terms and should include a default clause.
Lease purchase option agreements are often referred to as lease to own or lease options. Regardless of the name, lease purchase agreements involve renting a home while contributing funds toward the eventual purchase.
Sellers typically require a down payment to secure the property for sale. A portion of rent money is contributed toward the purchase price. Sellers rarely contribute the full amount. The average contribution hovers around 25- to 40-percent.
For example, if rent payments are $1,000 per month and sellers contribute 40-percent of rent monies toward the purchase, buyers would accrue $4,800 in home loan payments per year. If the contract extends for 3 years, buyers will have paid $14,400 toward the purchase price, along with down payment funds.
Sellers can allow buyers to lock-in the purchase price or require buyers to pay current market value when the contract ends. Buyers should submit rent payments via personal check and retain a copy of cashed checks to provide evidence of payment when applying for a home loan.
Subject 2 can be a good option for buyers with bad credit who can afford to buy a home, but do not qualify for financing. Buyers take over mortgage payments using the seller’s good credit and loan documents remain in the seller’s name until the buyer can obtain bank financing. However, property rights are transferred to the buyer, allowing them to take tax deductions.
Sub2 contracts can pose a risk for sellers, so careful consideration should be given before entering into this type of agreement. Buyers must engage in credit repair strategies to refinance mortgages as quickly as possible.