I am under contract with a non-warrantable condo and am working with my lender on financing options to do a portfolio loan since i can't get conventional (owner occupancy ratios). The numbers with him work alright, but need to pay to buy down points to make my monthly payments somewhat reasonable which i'm asking the seller to pay.
We presented the ask to the seller and the seller did something we weren't expecting next.
Since the seller owns his condo free and clear, he offered to loan me the money. These were his terms 30% down, 10 year 6.5% interest only loan amortized over 30 years with an ARM after the 10 years. Which if i'm doing my math right, makes me owe him roughly $1213 per month for those first 10 years. Personally - I think that is an insane ask and much worse than going with the portfolio loan. But i'm trying to entertain it.
What are your thoughts? How would you counter that, if at all? What are the risks in private lender vs. using a bank?
Appreciate the insight.
@Jeremy Clarke TONS of options here. First, we don't know your asking price so I can't double check your math but it does sound like one piece is off: if the mortgage is amortized over a 30 year period then you should use a 30 year mortgage payment. The first 10 years are fixed and then the next 20 are not fixed. We would call this a 10/1 ARM in the lending world. Maybe your purchase price is $285,000? If so, then you did the math right. I would say that a 6.5% owner financed loan is not far off. I wonder what your portfolio loan option is? If we could compare that might help us make some additional recommendations.
2nd if the seller owns this outright AND they offered owner financing already I'm going to float some ideas:
- What if you offered asking price but a choice of 6.5% with monthly payments or 8% with NO monthly payments. Instead you paid him in full 10 years down the line? Could you imagine having no monthly payments due? If he doesn't go for that offer 9% interest with no payments - who cares what the rate is. You are going to be swimming in cash to use on other things...not to blow at the track mind you...but to invest. Just an idea.
- What if you offered him OVER his asking price but with a payment that benefited you? For example, you offer $345,000 but pay him a payment over 15 years of $1390? Why would you do that? If he accepts that offer you just saved yourself about $200,000! With a 30 year loan, at 6% interest you pay about $250,000 in interest alone. Even with you offering $50k over ask, you still save $200,000 because that offer has no interest. Now, I didn't mention that it's a 0% loan did I? I just offered the payment structure. If the seller doesn't go for it, how about offering $365,000? You still save $180,000!!!
Seller financing can be anything you want it to be. Get creative. Get crazy! But find a way to get the loan to benefit you. Hope this helps!
@Andrew Postell this was helpful, thanks! The purchase price is $320,000 and the loan amount would be for $224,000. I like the creativity. What it comes down to for me are the monthly payments. I’m fine getting creative to make it work, but need to think of something that keeps the monthly as low as possible.
You asked on portfolio loan. That one is %35 down 4.75% interest rate (buy 2 points) over 7 years fixed - over 30 years.
@Jeremy Clarke thanks for sending those numbers. I would ask your bank what the rate would be if you didn't pay points for your loan. Since the owner financing rate is with no points as well that would be the right way to make an "apples to apples" comparison. Essentially, you are bringing , it might be pretty close to each other on the rate. Essentially you are bringing $120,000 to close with your bank (i'm estimating a little here). Your bank is offering you a 7/1 ARM. The seller's offer right now is for $100,000 to closing. He is also offering a 10/1 ARM. The seller's offer has a longer fixed period and a lower down payment amount. The seller's offer is better with the exception of the rate. So maybe offer him 2 points ($5,000) to see if he can get to 4.75% rate? Or if you are really concerned on the monthly payments, then offer and even higher rate with no monthly payments.