I recently had a client ask me to find a home to purchase in the Greenwich/Stamford area. They want a traditional colonial with good space, a reasonable sales price and a good location. No problem – that is a piece of cake. Well, here’s the rub: The client wanted me to find a home where the seller would be willing to provide owner financing.
Owner financing is quite simply a situation where the owner of a property agrees to act as the bank and provide the buyer a mortgage to finance the home. Owner financing is not new; and, it has always been provided throughout history. This form of financing really stepped up in prevalence after late 2008, when the mortgage market fell apart. People still had homes to sell; and, those who were in a position to offer this perk sold homes in an environment where others could not due to tightened traditional credit.
Even though the real estate market has recently sprung to life, the mortgage credit remains somewhat tight. Even very qualified buyers find themselves battling with underwriters to meet the current stricter lending standards. Do not make the mistake of believing that a person with poor credit can easily get owner financing. Homeowners are very savvy about the market and current lending standards. They may be much more flexible than traditional lenders; but, it is highly unlikely that the owner lender will ignore a poor credit rating in deciding to enter such an agreement with a buyer.
Typically, owner lenders want 20-25% as a down payment, proof of a solid credit history and proof of an ability to make the monthly payments. Well, you may say that sounds like a regular bank. Not really. Here are some examples of how a traditional lender may not be feasible for an otherwise excellent borrower:
– A Wall Street executive with an excellent credit history makes $250,000 per year in base salary and has received a bonus of $750,000 consistently for the past several years. Prior to the lending crisis, the fact that the bonus has been consistent for several years would be enough to base the executive’s borrowing power on the $1 million income. Today, unless the lender receives written verification from the employer that the bonus income will continue at the same level for several years, the bonus income will not count. Most employers will not make a written commitment to a set future bonus, even if there is a hand-shake understanding that it will continue. As such, the traditional lender will take this million dollar earner and reduce them to $250,000. That is a big hit in qualifying for a higher mortgage. That is something an owner lender may be willing to ignore.
– A well qualified person who is divorcing may need an owner lender. Such a buyer may find that their assets and income are tied up in providing support or while awaiting disposition of assets by the court. Although they can afford the payment of a new home, a traditional lender may not see it that way. The traditional lender will consider reduction of income and assets from support payments, other housing payments and disputed assets in determining the buyer’s ability to pay. You are unlikely to have this level of scrutiny from an owner lender.
It is clear that various situations may be present in the life of a very strong buyer/borrower which would preclude them from getting a traditional mortgage. The availability of owner financing allows such buyers to enjoy this rare marketplace of low rates and reasonably priced homes. Conversely, owners who are willing to provide financing greatly increase the marketability of their homes. It is not unusual for owner financiers to receive their asking sales price as well as a slightly higher interest rate because of their willingness to provide the means of purchase in a less stringent environment.
Check out my next BLOG post to read about some of the great homes in the Gold Coast towns offering owner financing.