Buying property is generally the most expensive single investment you will make. With this realisation, people have put off their property purchase dreams waiting to come into a substantial monetary pay-out. Even so, this often never comes to be and leaves people with an unfulfilled property ownership dream.
While there are millions of mortgage lenders nowadays, getting a commercial mortgage might not be the ideal route for some property buyers. This is often when you have a low credit score that will inform exorbitant mortgage interest rates. Solicitor firms here in London often recommend owner financing.
This is for people who have no cash to buy a property and do not qualify for favourable commercial mortgage terms. With this alternative, your property’s seller will agree on the sale in return for instalment payments that total to the property’s cost.
Your lawyer, in this case, will not just help you evaluate your owner financing options but also draft your documents. The two primary documents in owner financing include a deed of trust and promissory note. The promissory note details the amount of your monthly instalments while the deed of trust allows a seller to foreclose the property if you do not pay.
Here are your options for owner financing.
Leasing with an Alternative to Buy
Here, your property’s seller will retain the property’s ownership. You, however, reserve the right to buy the property in the future if you so wish. You will pay the estimated rent for properties in the same status as yours.
At the end of your lease’s term, you can choose to pay the remaining balance of the property’s purchase price and own the property. In this alternative, sellers will ask for a substantial down payment. This way, they increase the odds of the renter buying the property at the end of their lease term.
Here, you get a mortgage that is big enough to repay the existing loans and any equity in your property. As the property buyer, you will repay the larger mortgage while the seller meets the cost of the original mortgage. Wraparound mortgages carry the risk of the proper seller defaulting on payments.
In this instance, the mortgage lender will hold you responsible.
Buying Subject to an Existing Mortgage
This works much like the assumption of a mortgage. Unlike the latter, however, the seller still makes the payments to the mortgage lender. As such, if you do not make your monthly payments, the seller might have to use his/her cash. Few sellers agree to this option for owner financing.
Instalment Land Contract
This owner financing option is the riskiest one for buyers. In it, your property’s seller will retain ownership rights while you only acquire an equitable interest in the purchase. You will only get full property ownership after you have paid the last instalment of your purchase price.
The above options come with several risks for property buyers and sellers. The right documentation will, however, give you reprieve in case anything mars your transaction. For property buyers, owner financing guarantees faster and cheaper closing and gives you better terms compared to when using a commercial mortgage.