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Gaining mortgage approval plays a critical role in buying a home. Under normal circumstances, you simply can't buy a home if you don't qualify for a traditional loan. But owner financing is an alternative option if your mortgage application is declined. You'll still have to sign a promissory note, but owners selling their homes this way usually offer flexible qualification standards that help you get into the home while you raise your credit profile.
Owner financing is known by several names, including for-sale-by-owner, or FSBO, financing. It means that you, the buyer, borrow the money from the seller to purchase his property. This type of financing is usually a temporary accommodation by the seller, and you'll have to refinance with a conventionally acquired loan at some point in the future. Owner financing terms are negotiated. For example, some owners might allow you to rent their house for a while, and the money you pay on the lease is used as the down payment on a lender-acquired mortgage. Other owners might offer a more traditional arrangement, whereby you make a down payment to them, sign a promissory note and receive temporary title, known as equitable title, until you refinance the loan. If you only qualified for an 80 percent mortgage and don't have cash for the 20 percent down payment, it is considered owner financing if the owner extends the down payment to you as a second loan.
By offering financing, the seller in most cases has agreed to overlook your credit blemishes in the interest of selling her house. This gives you time to pay off your debts and raise your credit scores. Because a lending institution isn't involved, you won't be charged any more than a down payment or a deposit to seal the deal. And, if the house is vacant, you can negotiate a move-in in short order, which can be helpful if you're starting a new job or you have children starting school.
Homeowners usually offer financing if they're having trouble selling their home, either because it's located in an undesirable or remote place, the architecture is outdated or it has structural problems. If you're a homebuyer with credit problems, the seller may not be willing to negotiate his price if he thinks your credit problems have weakened your negotiating position. The biggest drawback to owner financing, however, is the pressure you face to qualify with a lender to refinance at the end of the owner financing term. If you fail to qualify, you run the risk of losing your down payment and deposit if you're asked to leave the home.
In all owner financing cases, you should have a qualified real estate attorney walk you through the entire process and prepare the paperwork. The attorney should conduct a title search, as you'll want the property title to be free and clear before you take full ownership. To ensure that the deal closes successfully, begin repairing your credit and saving up for any additional costs of acquiring the home immediately.