Many homeowners with properties for sale have a hard time finding qualified buyers. Stricter lending criteria have made it harder for many people who want to buy homes to qualify for home loans. Competition with low-cost bank-owned homes has made it difficult to find buyers willing to pay current market value.
To get the asking price of the property for sale, many sellers are offering creative financial strategies to attract buyers who may not qualify for bank loans. These include the owner will take, the lease purchase option agreements and the subject 2.
Entering unconventional financing allows homeowners to generate cash flow from their property and gives borrowers the opportunity to improve credit scores while working to purchase a home.
The owner will carry implies that the seller acts as a lender. Buyers provide a down payment to secure the property and send monthly payments that are contributed toward the purchase price. There are a few options when entering into this type of agreement.
The first involves the owner financing the full amount over 2-3 years. A real estate contract is executed by an attorney outlining the purchase price, interest rate, payment amount and due date, late fees, down payment amount, and a default clause.
Buyers must engage in credit repair strategies during the owner financing contract period to qualify for a home loan when the contract terms expire. Since there is no guarantee that buyers will be able to obtain bank financing, the contract should include legalese to address what action will be taken if buyers cannot qualify for a home loan.
The second type of owner financing consists of seller-transfer mortgages. This may include full or partial vendor financing. In most cases, sellers only take a portion of the purchase price, and buyers get a bank loan for the balance. When sellers pass through part of the purchase price, buyers require less financing, making it easier to qualify for bank financing.
When partial financing is offered, seller retroactive mortgages are typically extended from 2 to 5 years. The buyers have two mortgages against the property. The bank is the first lien holder and the seller carries the second mortgage. A real estate contract must be executed to record the terms of the loan and must include a default clause.
Lease-purchase agreements are often called lease-purchase or lease options. Regardless of the name, lease purchase agreements involve renting a home and contributing funds toward the final purchase.
Sellers generally require a down payment to guarantee the sale of the property. A portion of the rental money is contributed toward the purchase price. Sellers rarely contribute the full amount. The average contribution ranges from 25 to 40 percent.
For example, if rental payments are $1,000 per month and sellers put up 40 percent of the rental money toward the purchase, buyers would accumulate $4,800 in home loan payments per year. If the contract extends for 3 years, the buyers will have paid $14,400 of the purchase price, along with the funds from the down payment.
Sellers can allow buyers to set the purchase price or require buyers to pay current market value at the end of the contract. Buyers should send rental payments via personal check and keep a copy of cashed checks to provide evidence of payment when applying for a home loan.
Theme 2 may be a good option for buyers with bad credit who can afford to buy a home, but do not qualify for financing. Buyers make mortgage payments using the seller’s good credit, and loan documents remain in the seller’s name until the buyer can obtain bank financing. However, ownership rights are transferred to the buyer, allowing you to get tax deductions.
Sub2 contracts can be risky for sellers so careful consideration should be given before entering into this type of agreement. Buyers should engage in credit repair strategies to refinance mortgages as quickly as possible.
