It can be tricky to ask the seller to provide you with owner financing to buy a home in the Bay Area. If you ask the listing agent whether or not the owner is willing, the agent probably has no idea. If you ask the seller directly, they will likely refuse. This is because most owners have no idea about the benefits of owner financing to sell their home, and most have knowledge limited to conventional means of a buyer obtaining a mortgage through the bank.
In some cases, owner financing can be a real option, especially if the home is just not selling or lender guidelines have become too tight in the Bay Area.
What is Owner Financing?
When all or some of the purchase price, after the down payment, is carried by the seller instead of the buyer, the seller is offering owner financing. Rather than using a bank in the Bay Area, the buyer takes out a loan from the seller and makes monthly payments to the seller.
Sellers are more likely to agree to owner financing if the property is owned free and clear with no mortgage. In this case, the seller and buyer can agree on an interest rate, loan term and monthly payment and the buyer will pay the seller for equity on an installment basis.
Both parties are protected as the financial instrument can be recorded in the public records.
Sellers and buyers can negotiate most terms of owner financing, as long as both abide by usury laws and regulations in the Bay Area. Most sellers will want a substantial down payment on the home to protect their equity, as buyers are less likely to go into foreclosure if they have money in the deal.
Some types of owner financing include:
- Land contracts, which give the buyer equitable title but not legal title.
- Promissory notes and mortgages, in which the seller carries the mortgage for the home.
- Lease purchase agreements, in which the seller gives the buyer equitable title and leases the property.
Benefits for the Buyer
As the buyer, there are several advantages to owner financing in the Bay Area:
- Fewer qualifications necessary.
Even if the seller demands a credit report, they will likely have less stringent qualifications than a lender.
- Custom financing.
Unlike a conventional loan, you can choose from many payment options, or mix and match.
- Flexible down payment.
The down payment is negotiable. While some sellers want a very large down payment, some will allow the buyer to make several lump-sum payments toward the down payment.
- Lower closing costs.
There will be no loan or discount points, processing fees, origination fees or other fees frequently charged by lenders.
- Fast possession of the home.
Because you will not wait for the lender to process a mortgage, you can close faster.
Benefits for the Seller
The seller enjoys the following benefits:
- Higher sales price,
- Tax advantages,
- Monthly income,
- Higher interest rate,
- Shorter time on the market.