There is no bigger dream than the American Dream! People come from other all around the world just to have the chance to live the American Dream. The truth is, given the opportunity to live the American Dream, it’s easier said than done.
One of the biggest components of living the American Dream is homeownership. After the mortgage crisis of 2008 the government has tighten the mortgage guidelines. Even with rates being at an all time low, there are other factors that prevent potential buyers from getting a mortgage. These factors include, less than perfect credit, not enough job history, or maybe they can’t prove all their income due to being self-employed.
Although it may be tougher getting a traditional loan, if there is a will there is a way to still purchase a home. Yes you guessed it…owner financing. Below we will discuss some of the top benefits of owner finance for buyers.
After the mortgage crisis, lenders began tightening their lending requirements after the government began implementing new lending laws. The joke among lenders was if you could fog a mirror, you could get you a loan. The lending requirements were so loose, lenders practically could get anyone qualified. There were no down payments required and debt to income ratios were not as stringent as they are now. There were even stated income programs where as long as you had a good credit score, you could qualify for any amount you wanted.
Things have changed and many potential buyers are finding it tougher to qualify. With millions of people being self-employed and others still recovering from the recession, owner financing has become a more viable option for many potential buyers. The main reason is because it is easier to qualify.
Qualifying for an owner finance transaction is much easier since the lender/seller is not obligated to follow all the same mortgage requirements for traditional third party lending. The seller is the decision maker on whether they want to sell the property via owner finance or not. There is no mortgage underwriter requesting financial documents, your blood type and your first born. Yes I know that is a bit exaggerated but it can feel like that at times. With the Seller having an interest in selling the property as well, buyers will find it can be pretty simple to qualify for an owner financing transaction.
One of the biggest benefits of homeownership is the equity you build on the home. Equity is defined as the difference of the home’s fair market value and the outstanding balance of all liens on the property. If you are renting you have no chance of building equity. Owner financing, while they may not always have the best terms, still gives you the benefit of equity.
If the average house appreciates at 3% let’s take an example of $200k home.
In 5 years, a $200k home could appreciated more than $25k. Using current rates of 4% on a 30 year note, your principal balance after 5 years of payments would be $181,245.70. Based on the definition, there would be equity of approximately $43,856.00. Now imagine if the appreciation is more than 3%. In some markets, homes are currently appreciating between 6%-9%. This clearly illustrates the benefit of building equity.
Another great benefit of Owner Finance is tax deductions. The IRS allows to deduct real estate taxes, mortgage interest, and mortgage insurance premiums. IRS Publication 530 further details and explains what you can deduct from your home. Let’s look at the same $200k home example and see how much of a benefit this really is.
Deduction breakdown of a $200k 30 year loan at a 4% interest rate:
Real Estate Taxes
M I P
Even if you are not in the $200k range of homes you can start to see how tax deductions on a house can add up. Just imagine if you are in a higher price range how much your deductions can be. Always consult a CPA or tax professional for tax advice on how home deductions can benefit you.
Closing costs can add up pretty quickly when you purchase a home through third party financing. Lenders charge all types of fees such as loan origination, administration, processing, and yield spread on interest rates to name a few. When dealing with a owner finance transaction, buyers typically don’t pay any of those because the sellers don’t charge them. Sellers are not trying to figure out how they can make all these additional fees because they get the benefit of selling the home for a profit. Lenders have to charge extra fees to make money or there is no benefit for them to lend money to buyers. Buying a home via owner financing will reduce your closing costs substantially making it another big benefit.
Buying a home can be stressful. One of the reasons is because of the relocation process. Whether you are moving from out of town or just down the street the stress of moving can be overwhelming. A big contributor of the stress and frustration is timing. If you have to be in a new home for the school year or to start or maybe a new job, it’s hard to do if your loan has not been approved and you can’t move yet. In an owner finance transaction, a buyer can close and move into a property sometimes within days, since there is no third party lender holding up the transaction. Having the ability to close in a short period of time can be very beneficial in many circumstances.
As you can see owner finance has many benefits for buyers. Knowing how these transactions work can help you make the decision whether owner finance it right for you. If you have questions about how you can conduct an owner finance transaction, call one of our real estate attorneys to get more information today.