Owner Finance vs Rent-to-Own
Purchasing a home with owner financing allows buyers to avoid dealing with traditional mortgage lenders and instead borrow money directly from the seller. When to Consider an Owner-Financed Home This option benefits people who may not qualify for a traditional bank loan, because of credit, income, or job history. When a sellers is willing to owner finance their home they typically use less strict guidelines to approve you as a buyer, and you can also take advantage of more flexible loan terms, but will often pay for the flexibility with higher interest rates, fee’s and housing prices.
What to Expect in a Contract
Since most sellers won’t be around long enough to receive mortgage payments for 30 years, owner-financed contracts often last for a shorter period, such as five years. At the end of the loan term there is a balloon payment and the buyer is expected to refinance the loan. Interest rates are usually a little higher than you would find at a bank, since there is more personal risk involved for the homeowner. The owner also holds a promissory note for the home, meaning he or she can initiate a foreclosure if the borrower defaults on payments. However, there are a number of benefits for the buyer, as well.
You usually don’t need to qualify the same way a traditional buyer would, and your closing costs may be lower since you’re avoiding lender fees, but down payments on Owner-Financed homes are typically 10% or more of the purchase price of the home. By the time your contract with the owner ends, you should be ready to refinance into a traditional mortgage.
Always consult with a lawyer to ensure you are fairly represented in your owner-financing contract. As long as you have your legal ducks in a row, this can be a very effective way of buying a home regardless of your credit history, but be prepared to pay extra cash upfront for that flexibility.
A rent-to-own home differs from a traditional home purchase in that you do not start off with a mortgage from a bank. Instead, you create an agreement with your landlord to rent the house for a set number of years, where a portion of the monthly rent may go towards a future down payment. It sounds simple enough, but who is best suited for a rent-to-own property? What are the general terms of the contract? Could renting to own be right for you?
When to Consider Renting to Own
Consider a rent-to-own home if you need time to improve your credit score for a mortgage or to save up for a down payment on a home. It is also a beneficial arrangement for homeowners who want a long-term tenant, or are having trouble selling their home. If your current landlord isn’t interested in a rent-to-own arrangement, look online for listings or consult a local real estate agent.