How to Evaluate an Owner Financing Offer
When you cannot get approved for a traditional mortgage, using seller financing may provide a way for you to buy a home. With seller financing, you buy a home and the owner of the house finances a portion of the sale for you. If a seller approaches you with a seller financing offer, you should not blindly accept it just because it means you get to become a homeowner. It is important to review the terms before agreeing to anything.
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Instructions
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Look at the interest rate that is offered by the owner. Determine whether the interest rate is in line with other interest rates in the market. If you have been shopping for a mortgage with a traditional lender, you should have an idea of what current interest rates are. If you cannot get a traditional mortgage, the interest rate on the owner financing deal is probably higher than what market rates are, because of the increased risk you present.
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Evaluate the loan structure. For example, the loan may have a fixed term of 30 years or it could have a balloon payment that is due in 10 years. Not all owner financing situations are designed to provide you with a long-term solution. They may only provide you with a short-term solution so that you can buy the house and build up your credit rating and refinance the property later.
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Determine what type of interest rate the loan has. Some loans have a fixed interest rate over the life of the loan, while others have an adjustable interest rate that is tied to some floating rate. Some loans will provide you with a fixed interest rate for the first few years, and the rate becomes adjustable after that.
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Find out what happens if you are late on a payment. The owner financing agreement should have specific information about what happens if you cannot afford to make your payment or if you make a late payment. If anything happens in terms of your ability to make payments, you should know exactly what to expect.
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Determine how much the seller requires in the form of a down payment. Typically, you must make a cash down payment before the owner will finance the property. Make sure you can afford the down payment the seller requires.
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Tips & Warnings
Do not agree to terms you are not comfortable with. Some sellers use owner financing as a way to take advantage of those who cannot afford to purchase a home any other way.
