What do I need to know about owner finance?

4 Replies

I am about to make an inter-family deal on a single family home. I am look to do an owner finance deal what do I need to know about it? Pros/Cons? I do plan on refinancing down the road just waiting to boost my credit score. 

Understand how the finances work with principal/interest payments, balloon payment terms, how interest rate affects monthly payments, and timeline for your ability to refinance. 

You don't want to be stuck with a balloon payment coming due without the option to refinance.

@Marc Rice Thank you for the advice and I am very new to real estate. How do I avoid a balloon payment? The agreement I have set up for the deal with the relative is 10% down for 30 year fixed at 4% Interest rate until I’m ready to refinance the mortgage. My understanding of owner financing is that instead of a traditional bank the family member is the bank. Is their more I need to worry about? Am I over simplifying it?

Originally posted by @Zach Iannucci :

@Marc Rice Thank you for the advice and I am very new to real estate. How do I avoid a balloon payment? The agreement I have set up for the deal with the relative is 10% down for 30 year fixed at 4% Interest rate until I’m ready to refinance the mortgage. My understanding of owner financing is that instead of a traditional bank the family member is the bank. Is their more I need to worry about? Am I over simplifying it?

Traditionally most seller financing only involves a short period of 3-7yrs of seller financing at white point a balloon payment would occur which forces the buyer to refinance before the balloon is due, essentially guaranteeing the seller wont be stuck holding a mortgage for 30yrs. 

In your example, it sounds like the family member trusts you will get it refinanced in a reasonable time so they are not putting a balloon payment in the timeline. Thats GREAT! Those terms are fantastic too as most Fannie 30yr fixeds are about 4% interest rate with less than 20% down. I would feel comfortable going forward with the owner financing terms if the purchase price is also fair.

As always, I'd recommend a lawyer to review the terms/contract because I am not a lawyer and either are you. Good luck!