What is owner financing? Also known as selling your house on terms, this is where a homeowner sell their home to a buyer and sets up a mortgage just like a bank. They will expect a down payment, interest on the loan, and the ability to foreclose on the home if the buyer doesn’t pay. This is also helpful to a buyer who may not qualify to purchase a home with traditional bank financing as homeowners can chose to be a little more lenient. Check out these 4 tips for selling your house with owner financing in Kansas City.
Tip #1: Check Buyer Qualifications
It is pretty easy to find willing buyers if you market your home for sale on terms. Take a moment to consider why these people aren’t able to purchase the home with traditional bank financing. It is extremely important to screen all of your buyers to make sure they are qualified and will take care of the home and your investment. Make sure you require your potential buyer to fill out a loan application and investigate all the information provided, such as current employment and references. Also, conduct a background check and run a credit report. Do everything a traditional bank would do. You can choose to be a little more flexible than a bank, but by really wary of setting yourself up with an untrustworthy buyer and all of the headaches that that can cause.
Tip #2: Make it Legal
When you find your buyer, make sure you draw up a legal contract with all your agreed-upon terms. Make sure you include loan term, down payment, interest rate, payment schedule, and what happens if they default. You will also want to make sure that you draft a promissory note and have the executed document recorded with the county. This is how you prove that you are the mortgagee and you can foreclose if they default. It is extremely important that all of the words and phrases are legal, and that you do not forget an important part of the contract. A small mistake can end up costing you tons of time, money, and stress in the long run.
Tip #3: Owner Perks
The whole owner financing process seems to be in favor of the buyer, who may not be able to obtain traditional financing through a regular bank, so why would an owner support this option? You will collect interest on the loan! Many times you’ll be able to make more money selling via owner finance than simply taking a lump sum of money for the home all at once. A full 30 yr mortgage can be 50-200% more than the original price of the home. You may be able to collect even more interest if you allow for a longer loan period. Another great thing is that if you end up not liking the arrangement, there is a whole secondary market for mortgage notes that you can sell your note into. Keep in mind, this will fully depend on the creditworthiness of the buyer and whether they have been making on-time payments or not.
Tip #4: Collect like a Pro
A very important part of financing your own sale is the bookkeeping or “servicing” of your own loan. You need to keep track of all of the payments and when they were made, the real estate tax, insurance, any homeowners association fees, and anything else to do with the note. Hiring a 3rd party to take care of the loan servicing will save you a lot of time and possible errors in the future. You may also be able to accept multiple forms of payment this way to make it easier for your buyer to make the payments on time with a less likely chance of default. Having a professional note servicer will take a lot of liabilities off your hands and provide you with more free time to focus on what you enjoy.