What Interest Rate for Owner Financing?

Question

We have agreed to owner finance our primary home for a short term balloon loan.  30 year amortized, and then a balloon at about 16 or 18 months, still working on the details.  They do qualify for financing now, but for various reasons we decided to do this (I won't bother going into why since that's not the point of my question).  My question is what tends to be a standard range  to charge on interest above prime or what a bank would give them, for providing the owner financing.  Like one (1)% above prime?  More?  Yes, I know it is whatever we want or agree upon.  I'm trying to know what tends to be a standard and is considered fair for both parties.  Thanks in advance.

Steve Vaughan · Answer

Depending on the size of the down payment and character and credit of your buyer, I'd be in the 6-7% range most likely.

Most of my sellers want 7%, but after I provide references and proof of experience I get it down to 6%.

I qualify for 4.25% 15yr or 4.625% 30 yr conventional loans on investment property - so that's prime + about 1.5% @Kathryn Bowden.

Kathryn Bowden · Answer

Well, for whatever it's worth - in case it makes a difference - the buyers needed to wait to file their 2017 taxes on January 1st.  They are self-employed and need to show their income for 2017 to qualify.  They wrote off everything and the kitchen sink previous to this, plus their income is increasing substantially.  Their loan officer (known as a competent and respected guy around here), has provided a pre-approval letter based on their bank statements.  They have also agreed to pay for an expedited appraisal because of the delay in underwriting.  There's a little more to it than that, but we agreed it would be in everybody's best interest for us to give them a short term loan.  We have also been in this house 4.5 years and just learned about the new tax rule pertaining to this.  We have a contract prior to 2018, but if we lose this deal we'll be stuck waiting to list this place till April - we'd be foolish to not wait the five years, but we need to sell now.  We'd also like to know for sure this deal doesn't fall through with the bank loan, plus we would be closing end of December with our owner finance, before the new tax bill kicks in,  just in case something else changes on that bill that would take away that pre-January contract exception.  So it is in both our interest's.

Aaron K. · Answer

Because owner financing is usually not used in this way when the buyer is qualified with a bank there really is no standard interest rate, I have seen owners offering at 5-6% but that is usually for low priced properties.  As you mentioned it really is up to you and what you think is fair.

Steve Vaughan · Answer

Usually it's split like closing and escrow fees.   Drafting from the title co local network attorney that does these a lot would usually run about $300-$500.

Kathryn, how did this go? It's been 6 years.  Would love an update!

Russell Brazil · Answer

In the most recent version of the Senate bill, properties that were under contract prior to January 1 2018 were going to still be under the old 2 in 5 year rule.  How it was financed, or when it closes was not addressed in the bill at all.

Kathryn Bowden · Answer

Thank you @Russell Brazil, also, would owner financing have any bearing on the sale date?  Like if we close the deal on 12/31/2017, but owner finance, I assume the IRS considers that the sale date - 12/31/2017?

@Brandon Hall

Russell Brazil · Answer

A CPA like @Brandon Hall will be to elaborate on the proration. However do be aware that the 2 out of the last 5 year rule is very likely to change to 5 out of the last 8 if the tax bill is passed. However it is looking more and more like the tax bill is going to have a hard time getting passed in the Senate.

Kathryn Bowden · Answer

@Marco G., I cannot find where this is true - that if you've lived in your primary home for less than two of five years (or five of eight), you get to prorate the time.  I did find where you can prorate it if you meet other exemptions caused by a hardship like health, etc.  I always thought that if I don't meet that two (five) years, than I'm just out of luck.  You don't happen to have a handy link where I can read about that specifically?

@Russell Brazil

Kathryn Bowden · Answer

Also, would the buyer normally pay for the cost to put the loan together, like they would for their own bank loan?  Or is it normally split?  Or .... ?

What Interest Rate for Owner Financing?

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