The Pros & Cons of Offering Owner Financing (When You Sell Your Home)

Sometimes, home sellers find a buyer eager to purchase but unable to finance the property with traditional mortgage financing. Sellers then have a choice: lose the buyer, or lend the mortgage to the buyer themselves.

If you want to sell a property you own free and clear, with no mortgage, you can theoretically finance a buyer’s full first mortgage. Alternatively, you could offer just a second mortgage, to bridge the gap between what the buyer can borrow from a conventional lender and the cash they can put down.

Should you ever consider offering financing? What’s in it for you? And most importantly, how do you protect yourself against losses?

Before taking the plunge to offer seller financing, make sure you understand all the pros, cons, and options available to you as “the bank” when lending money to a buyer.

Advantages to Offering Seller Financing

Although most sellers never even consider offering financing, a few find themselves forced to contemplate it.

For some sellers, it could be that their home lies in a cool market with little demand. Others own unique properties that appeal only to a specific type of buyer or that conventional mortgage lenders are wary to touch. Or the house may need repairs in order to meet habitability requirements for conventional loans.

Sometimes the buyer may simply be unable to qualify for a conventional loan, but you might know they’re good for the money if you have an existing relationship with them.

There are plenty of perks in it for the seller to offer financing. Consider these pros as you weigh the decision to extend seller financing.

1. Attract & Convert More Buyers

The simplest advantage is the one already outlined: You can settle on your home even when conventional mortgage lenders decline the buyer.

Beyond salvaging a lost deal, sellers can also potentially attract more buyers. “Seller Financing Available” can make an effective marketing bullet in your property listing.

If you want to sell your home in 30 days, offering seller financing can draw in more showings and offers.

Bear in mind that seller financing doesn’t only appeal to buyers with shoddy credit. Many buyers simply prefer the flexibility of negotiating a custom loan with the seller rather than trying to fit into the square peg of a loan program.

2. Earn Ongoing Income

As a lender, you get the benefit of ongoing monthly interest payments, just like a bank.

It’s a source of passive income, rather than a one-time payout. In one fell swoop, you not only sell your home but also invest the proceeds for a return.

Best of all, it’s a return you get to determine yourself.

3. You Set the Interest Rate

It’s your loan, which means you get to call the shots on what you charge. You may decide seller financing is only worth your while at 6% interest, or 8%, or 10%.

Of course, the buyer will likely try to negotiate the interest rate. After all, nearly everything in life is negotiable, and the terms of seller financing are no exception.

4. You Can Charge Upfront Fees

Mortgage lenders earn more than just interest on their loans. They charge a slew of one-time, upfront fees as well.

Those fees start with the origination fee, better known as “points.” One point is equal to 1% of the mortgage loan, so they add up fast. Two points on a $250,000 mortgage comes to $5,000, for example.

But lenders don’t stop at points. They also slap a laundry list of fixed fees on top, often surpassing $1,000 in total. These include fees such as a “processing fee,” “underwriting fee,” “document preparation fee,” “wire transfer fee,” and whatever other fees they can plausibly charge.

When you’re acting as the bank, you can charge these fees too. Be fair and transparent about fees, but keep in mind that you can charge comparable fees to your “competition.”

5. Simple Interest Amortization Front-Loads the Interest

Most loans, from mortgage loans to auto loans and beyond, calculate interest based on something called “simple interest amortization.” There’s nothing simple about it, and it very much favors the lender.

In short, it front-loads the interest on the loan, so the borrower pays most of the interest in the beginning of the loan and most of the principal at the end of the loan.

For example, if you borrow $300,000 at 8% interest, your mortgage payment for a 30-year loan would be $2,201.29. But the breakdown of principal versus interest changes dramatically over those 30 years.

  • Your first monthly payment would divide as $2,000 going toward interest, with only $201.29 going toward paying down your principal balance.
  • At the end of the loan, the final monthly payment divides as $14.58 going toward interest and $2,186.72 going toward principal.

It’s why mortgage lenders are so keen to keep refinancing your loan. They earn most of their money at the beginning of the loan term.

The same benefit applies to you, as you earn a disproportionate amount of interest in the first few years of the loan. You can also structure these lucrative early years to be the only years of the loan.

6. You Can Set a Time Limit

Not many sellers want to hold a mortgage loan for the next 30 years. So they don’t.

Instead, they structure the loan as a balloon mortgage. While the monthly payment is calculated as if the loan is amortized over the full 15 or 30 years, the loan must be paid in full within a certain time limit.

That means the buyer must either sell the property within that time limit or refinance the mortgage to pay off your loan.

Say you sign a $300,000 mortgage, amortized over 30 years but with a three-year balloon. The monthly payment would still be $2,201.29, but the buyer must pay you back the full remaining balance within three years of buying the property from you.

You get to earn interest on your money, and you still get your full payment within three years.

7. No Appraisal

Lenders require a home appraisal to determine the property’s value and condition.

If the property fails to appraise for the contract sales price, the lender either declines the loan or bases the loan on the appraised value rather than the sales price — which usually drives the borrower to either reduce or withdraw their offer.

As the seller offering financing, you don’t need an appraisal. You know the condition of the home, and you want to sell the home for as much as possible, regardless of what an appraiser thinks.

Foregoing the appraisal saves the buyer money and saves everyone time.

8. No Habitability Requirement

When mortgage lenders order an appraisal, the appraiser must declare the house to be either habitable or not.

If the house isn’t habitable, conventional and FHA lenders require the seller to make repairs to put it in habitable condition. Otherwise, they decline the loan, and the buyer must take out a renovation loan (such as an FHA 203k loan) instead.

That makes it difficult to sell fixer-uppers, and it puts downward pressure on the price. But if you want to sell your house as-is, without making any repairs, you can do so by offering to finance it yourself.

For certain buyers, such as handy buyers who plan to gradually make repairs themselves, seller financing can be a perfect solution.

9. Tax Implications

When you sell your primary residence, the IRS offers an exemption for the first $250,000 of capital gains if you’re single, or $500,000 if you’re married.

However, if you earn more than that exemption, or if you sell an investment property, you still have to pay capital gains tax. One way to reduce your capital gains tax is to spread your gains over time through seller financing.

It’s typically considered an installment sale for tax purposes, helping you spread the gains across multiple tax years. Speak with an accountant or other financial advisor about exactly how to structure your loan for the greatest tax benefits.


Drawbacks to Seller Financing

Seller financing comes with plenty of risks. Most of the risks center around the buyer-borrower defaulting, they don’t end there.

Make sure you understand each of these downsides in detail before you agree to and negotiate seller financing. You could potentially be risking hundreds of thousands of dollars in a single transaction.

1. Labor & Headaches to Arrange

Selling a home takes plenty of work on its own. But when you agree to provide the financing as well, you accept a whole new level of labor.

After negotiating the terms of financing on top of the price and other terms of sale, you then need to collect a loan application with all of the buyer’s information and screen their application carefully.

That includes collecting documentation like several years’ tax returns, several months’ pay stubs, bank statements, and more. You need to pull a credit report and pick through the buyer’s credit history with a proverbial fine-toothed comb.

You must also collect the buyer’s new homeowner insurance information, which must include you as the mortgagee.

You need to coordinate with a title company to handle the title search and settlement. They prepare the deed and transfer documents, but they still need direction from you as the lender.

Be sure to familiarize yourself with the home closing process, and remember you need to play two roles as both the seller and the lender.

Then there’s all the legal loan paperwork. Conventional lenders sometimes require hundreds of pages of it, all of which must be prepared and signed. Although you probably won’t go to the same extremes, somebody still needs to prepare it all.

2. Potential Legal Fees

Unless you have experience in the mortgage industry, you probably need to hire an attorney to prepare the legal documents such as the note and promise to pay. This means paying the legal fees.

Granted, you can pass those fees on to the borrower. But that limits what you can charge for your upfront loan fees.

Even hiring the attorney involves some work on your part. Keep this in mind before moving forward.

3. Loan Servicing Labor

Your responsibilities don’t end when the borrower signs on the dotted line.

You need to make sure the borrower pays on time every month, from now until either the balloon deadline or they repay the loan in full. If they fail to pay on time, you need to send late notices, charge them late fees, and track their balance.

You also have to confirm that they pay the property taxes on time and keep the homeowners insurance current. If they fail to do so, you then have to send demand letters and have a system in place to pay these bills on their behalf and charge them for it.

Every year, you also need to send the borrower 1098 tax statements for their mortgage interest paid.

In short, servicing a mortgage is work. It isn’t as simple as cashing a check each month.

4. Foreclosure

If the borrower fails to pay their mortgage, you have only one way to forcibly collect your loan: foreclosure.

The process is longer and more expensive than eviction and requires hiring an attorney. That costs money, and while you can legally add that cost to the borrower’s loan balance, you need to cough up the cash yourself to cover it initially.

And there’s no guarantee you’ll ever be able to collect that money from the defaulting borrower.

Foreclosure is an ugly experience all around, and one that takes months or even years to complete.

5. The Buyer Can Declare Bankruptcy on You

Say the borrower stops paying, you file a foreclosure, and eight months later, you finally get an auction date. Then the morning of the auction, the borrower declares bankruptcy to stop the foreclosure.

The auction is canceled, and the borrower works out a payment plan with the bankruptcy court judge, which they may or may not actually pay.

Should they fail to pay on their bankruptcy payment plan, you have to go through the process all over again, and all the while the borrowers are living in your old home without paying you a cent.

6. Risk of Losses

If the property goes to foreclosure auction, there’s no guarantee anyone will bid enough to cover the borrower’s loan debt.

You may have lent $300,000 and shelled out another $20,000 in legal fees. But the bidding at the foreclosure auction might only reach $220,000, leaving you with a $100,000 shortfall.

Unfortunately, you have nothing but bad options at that point. You can take the $100,000 loss, or you can take ownership of the property yourself.

Choosing the latter means more months of legal proceedings and filing eviction to remove the nonpaying buyer from the property. And if you choose to evict them, you may not like what you find when you remove them.

7. Risk of Property Damage

After the defaulting borrower makes you jump through all the hoops of foreclosing, holding an auction, taking the property back, and filing for eviction, don’t delude yourself that they’ll scrub and clean the property and leave it in sparkling condition for you.

Expect to walk into a disaster. At the very least, they probably haven’t performed any maintenance or upkeep on the property. In my experience, most evicted tenants leave massive amounts of trash behind and leave the property filthy.

In truly terrible scenarios, they intentionally sabotage the property. I’ve seen disgruntled tenants pour concrete down drains, systematically punch holes in every cabinet, and destroy every part of the property they can.

8. Collection Headaches & Risks

In all of the scenarios above where you come out behind, you can pursue the defaulting borrower for a deficiency judgment. But that means filing suit in court, winning it, and then actually collecting the judgment.

Collecting is not easy to do. There’s a reason why collection accounts sell for pennies on the dollar — most never get collected.

You can hire a collection agency to try collecting for you by garnishing the defaulted borrower’s wages or putting a lien against their car. But expect the collection agency to charge you 40% to 50% of all collected funds.

You might get lucky and see some of the judgment or you might never see a penny of it.


Options to Protect Yourself When Offering Seller Financing

Fortunately, you have a handful of options at your disposal to minimize the risks of seller financing.

Consider these steps carefully as you navigate the unfamiliar waters of seller financing, and try to speak with other sellers who have offered it to gain the benefit of their experience.

1. Offer a Second Mortgage Only

Instead of lending the borrower the primary mortgage loan for hundreds of thousands of dollars, another option is simply lending them a portion of the down payment.

Imagine you sell your house for $330,000 to a buyer who has $30,000 to put toward a down payment. You could lend the buyer $300,000 as the primary mortgage, with them putting down 10%.

Or you could let them get a loan for $270,000 from a conventional mortgage lender, and you could lend them another $30,000 to help them bridge the gap between what they have in cash and what the primary lender offers.

This strategy still leaves you with most of the purchase price at settlement and lets you risk less of your own money on a loan. But as a second mortgage holder, you accept second lien position

That means in the event of foreclosure, the first mortgagee gets paid first, and you only receive money after the first mortgage is paid in full.

2. Take Additional Collateral

Another way to protect yourself is to require more collateral from the buyer. That collateral could come in many forms. For example, you could put a lien against their car or another piece of real estate if they own one.

The benefits of this are twofold. First, in the event of default, you can take more than just the house itself to cover your losses. Second, the borrower knows they’ve put more on the line, so it serves as a stronger deterrent for defaults.

3. Screen Borrowers Thoroughly

There’s a reason why mortgage lenders are such sticklers for detail when underwriting loans. In a literal sense, as a lender, you are handing someone hundreds of thousands of dollars and saying, “Pay me back, pretty please.”

Only lend to borrowers with a long history of outstanding credit. If they have shoddy credit — or any red flags in their credit history — let them borrow from someone else. Be just as careful of borrowers with little in the way of credit history.

The only exception you should consider is accepting a cosigner with strong, established credit to reinforce a borrower with bad or no credit. For example, you might find a recent college graduate with minimal credit who wants to buy, and you could accept their parents as cosigners.

You also could require additional collateral from the cosigner, such as a lien against their home.

Also review the borrower’s income carefully, and calculate their debt-to-income ratios. The front-end ratio is the percentage of their monthly income required to cover all housing costs: principal and interest, property taxes, homeowner’s insurance, and any condominium or homeowners association fees.

For reference, conventional mortgage lenders allow a maximum front-end ratio of 28%.

The back-end ratio includes not just housing costs, but also overall debt obligations. That includes student loans, auto loans, credit card payments, and all other mandatory monthly debt payments.

Conventional mortgage loans typically allow 36% at most. Any more than that and the buyer probably can’t afford your home.

4. Charge Fees for Your Trouble

Mortgage lenders charge points and fees. If you’re serving as the lender, you should do the same.

It’s more work for you to put together all the loan paperwork. And you will almost certainly have to pay an attorney to help you, so make sure you pass those costs along to the borrower.

Beyond your own labor and costs, you also need to make sure you’re being compensated for your risk. This loan is an investment for you, so the rewards must justify the risk.

5. Set a Balloon

You don’t want to be holding this mortgage note 30 years from now. Or, for that matter, to force your heirs to sort out this mortgage on your behalf after you shuffle off this mortal coil.

Set a balloon date for the mortgage between three and five years from now. You get to collect mostly interest in the meantime, and then get the rest of your money once the buyer refinances or sells.

Besides, the shorter the loan term, the less opportunity there is for the buyer to face some financial crisis of their own and stop paying you.

6. Be Listed as the Mortgagee on the Insurance

Insurance companies issue a declarations page (or “dec page”) listing the mortgagee. In the event of damage to the property and an insurance claim, the mortgagee gets notified and has some rights and protections against losses.

Review the insurance policy carefully before greenlighting the settlement. Make sure your loan documents include a requirement that the borrower send you updated insurance documents every year and consequences if they fail to do so.

7. Hire a Loan Servicing Company

You may multitalented and an expert in several areas. But servicing mortgage loans probably isn’t one of them.

Consider outsourcing the loan servicing to a company that specializes in it. They send monthly statements, late notices, 1098 forms, and escrow statements (if you escrow for insurance and taxes), and verify that taxes and insurance are current each year. If the borrower defaults, they can hire a foreclosure attorney to handle the legal proceedings.

Examples of loan servicing companies include LoanCare and Note Servicing Center, both of whom accept seller-financing notes.

8. Offer Lease-to-Own Instead

The foreclosure process is significantly longer and more expensive than the eviction process.

In the case of seller financing, you sell the property to the buyer and only hold the mortgage note. But if you sign a lease-to-own agreement, you maintain ownership of the property and the buyer is actually a tenant who simply has a legal right to buy in the future.

They can work on improving their credit over the next year or two, and you can collect rent. When they’re ready, they can buy from you — financed with a conventional mortgage and paying you in full.

If the worst happens and they default, you can evict them and either rent or sell the property to someone else.

9. Explore a Wrap Mortgage

If you have an existing mortgage on the property, you may be able to leave it in place and keep paying it, even after selling the property and offering seller financing.

Wrap mortgages, or wraparound mortgages, are a bit trickier and come with some legal complications. But when executed right, they can be a win-win for both you and the buyer.

Say you have a 30-year mortgage for $250,000 at 3.5% interest. You sell the property for $330,000, and you offer seller financing of $300,000 for 6% interest. The buyer pays you $30,000 as a down payment.

Ordinarily, you would pay off your existing mortgage for $250,000 upon selling it. Most mortgages include a “due-on-sale” clause, requiring the loan to be paid in full upon selling the property.

But in some circumstances and some states, you may be able to avoid triggering the due-on-sale clause and leave the loan in place.

You keep paying your mortgage payment of $1,122.61, even as the borrower pays you $1,798.65 per month. In a couple of years when they refinance, they pay off your previous mortgage in full, plus the additional balance they owe you.

Of course, you still run the risk that the borrower stops paying you. Then you’re saddled with making your monthly mortgage payment on the property, even as you slog through the foreclosure process to try and recover your losses.


Final Word

Offering seller financing comes with risks. But those risks may be worth taking, especially for hard-to-sell properties.

Only you can decide what risk-reward ratio you can live with, and negotiate loan terms to ensure you come out on the right side of the ratio. For unique or other difficult-to-finance properties, seller financing may be the only way to sell for what the property’s worth.

Before you write off the returns as low, remember that your APR will be far higher than the interest rate charged.

Beyond the upfront fees you can charge, you’ll also benefit from simple interest amortization, which front-loads the interest so that nearly all of the monthly payment goes toward interest in the first few years — the only years you need to finance if you structure the loan as a balloon mortgage.

Just be sure to screen all borrowers extremely carefully, and to take as many precautions as you can. If the borrower can’t qualify for a conventional mortgage, consider that a glaring red flag. Seller financing involves risking many thousands of dollars in a single transaction, so take your time and get it right.

Source: moneycrashers.com

Is It Smart to Buy Rentals When You Are Young?

Last Updated on August 8, 2020 by Mark Ferguson

invest when youngThere are many challenges to buying rental properties when you are young, but there are also many advantages. The biggest challenge to buying rental properties is getting enough money to pay for down payments, repairs, and reserves. However, there are many ways to buy rental properties with little money down, and it is easier to buy with less money down when you are young. When you are young, you can be more flexible, don’t have as many responsibilities, and have more time. When we get older, we have many more responsibilities, less time, and are not willing to make as many sacrifices in our living situation.

How much money do you need to buy a rental property?

The biggest challenge to buying a rental property is saving enough money for the down payment and other costs. As an investor, you will have to put down 20 percent or more when dealing with traditional banks. I usually spend at least $30,000 on the rentals I buy priced around $100,000. I need 20% for the down payment, money to repair the home, and I have to pay for carrying costs. I like to buy homes that need repairs because I am getting a great deal and will make more money in the long run. You do not have to spend $30,000 on a rental property if you can be flexible in your living situation.

A big problem that many people have, including myself, is that it is tough to find rentals that are $100,000!  I used to have my pick in Northern Colorado after the housing crash, but now those houses are $300,000! If you have to spend $300,000 to buy a rental property, you don’t need $30,000—you need $90,000.

You have the option to buy in another market or change niches, which is what I did by purchasing commercial rental properties instead. Or you can look for ways to buy with less money down.

How to buy with less money

The easiest way to buy a rental property with little money down is to buy as an owner occupant. An owner occupant usually has to live in a home for one year to satisfy the owner-occupancy requirements. The tough part about buying as an owner occupant is many people don’t want to live in the houses they use as rental properties.

When you buy as an owner occupant, you can put 3.5% down with an FHA loan or even $0 down with VA or USDA. There are even down payment assistance programs that will decrease the down payment, and you can ask the seller to pay for the closing costs, which can eliminate them. Buying as an owner occupant can reduce the money needed from $30,000 to $5,000 or even less. It is entirely possible to buy a house with $1,000 in the right market with the right loan.

There are also ways to buy multifamily properties with little money down as an owner occupant. This is commonly called house hacking and someone lives in a property and collect rent while living there as well.

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Why is it easier for young investors?

One of the tough things about investing with little money down is it takes a lot of sacrifices from the investor and their family. If you are older with a family, it can be really hard to move over and over. It can also be really hard to move into a property that makes sense as a rental. It is also tough for families to live in a home that needs work.

When you are young, you can buy a rental property as an owner occupant and live there for a year and move out of the property. The next move for many investors is to buy another rental property and repeat the process. This strategy takes a lot of moving and flexibility, and most families do not want to move every year. When you are young with nothing to tie you down (and less stuff), it is much easier to move every year. The great part about buying as an owner occupant is you can keep buying houses with little money down.

You also do not have to spend money on repairs right away because you can slowly repair the house while you live in it. There will be requirements pertaining to the condition the home must be in to get owner-occupied loans, but it is still very possible to get a great deal as an owner occupant buyer.

Young investors have more time

It takes time to learn how to buy rentals properties; what strategy you want to use, where you want to invest, and to learn about your market. As we get older we have less and less time. You get married, have kids, have a job and it is tough to find time for your kids, let alone your own hobbies or learning how to invest. Younger people often have more time to learn and educate themselves. Even if you are young and have no possible way to buy a property, you can still learn how to invest in rentals and develop a strategy that fits your goals so that when you can buy, you are ready.

I like to be a very positive person, but that does not mean I do not plan for the worst-case scenario. Another advantage of being young is you have more time to recover if you make a mistake or run into bad luck. If you buy a rental property when you are 25 and end up losing money on the rental, or even worse, losing that rental property, you have a lot of time to recover and build. If you are 60 and lose a rental property or make a bad investment, it is much harder to recover.  I am not saying you should not invest when you are 60. I think any age is a great time to buy rental proprieties, but the sooner you buy the better.

I wrote a book for young investors called: Buying Into Success. It is all about a college grad on the rat race who discovers real estate. You can find it on Amazon as a paperback and Ebook.

Young investors only have to convince themselves to invest in rentals

There are many people with negative beliefs about rental properties and real estate. Those beliefs are not always founded on facts, but rather, hearsay. Convincing someone to change their beliefs is not easy no matter how favorable you think your argument is. When you are young without a spouse or children, you only have to convince yourself that investing is a great idea and will help you financially. When you get married and have children, you will have to convince your wife, children, and possibly your in-laws that investing is a good idea. If just one of those people has a belief that real estate investing is dangerous and could hurt the family, you may never be able to change that belief.

If you invest in rentals or real estate at a young age and make money with investments, you won’t have to worry as much about convincing someone it is a good idea. You will have proof that you made money, and your loved ones will get to know you as someone who is a real estate investor.

Why do the returns on rental properties increase as time goes by?

The longer you own rental properties, the better investment they become. Here are a few basic advantages of buying rental properties when you are young and holding them long-term.

  • Cash flow: Cash flow increases with time as rents rise and mortgage payments stay the same or mortgages are paid off. Rents will not always increase, and it may take years, but historically, rents have always increased.
  • Appreciation: I do not count on appreciation to make money, but houses also appreciate over time. The longer you own a home, the more it appreciates. If you get a loan on a house, the the gain in appreciation is multiplied. As an owner-occupant, you might only put $5,000 down on a house, but it could appreciate $20,000 in one year. A house may also decrease in value over the short-term, but if you own it long enough, it will increase in value.
  • Tax advantages: You are allowed to depreciate rental properties for over 27.5 years, which saves a lot of money on your taxes. You can also complete a 1031 exchange into another investment, which could allow you to sell for a huge profit without paying taxes.
  • Build passive income: Over time, one rental property may not make you a ton of money, but if you buy multiple rental properties, you can make a lot of money.

How much money do you need to buy a rental property as an owner occupant?

The amount of money needed to buy a rental property will vary on the property and the loan program. I discuss various loan programs here, but most owner occupants should be able to get a loan with 5 percent down using conventional, 3.5 percent down using FHA, and no money down using VA or USDA. There will be closing costs associated with the loan, which can run from 2 to 5 percent, but you can ask the seller to pay those for you. If you buy a home that needs repairs, you will have to spend money making those repairs, but you don’t have to do it right away. You could repair the house as you live in it, saving time and money over hiring a contractor.

I usually do not recommend doing the repairs on investment properties yourself if you do not live in the property. If you try to make the repairs on an investment property yourself, it often takes much more time and costs you more money in the end over hiring a good contractor. If you are living in the home, it is easier to make the repairs because you are always there, and taking more time to make the repairs will not cost you money since you can’t rent out a single-family house for a year anyway.

If you use a no-money-down loan and make repairs while you live in the home, you could buy a rental property with no money and then spend less than $5,000 in total on repairs depending on what you fix. If you have to use a higher down payment loan, your costs will increase, but it will be much less than buying as an investor. Remember, with less money down it will be harder to get positive cash flow on a home because of the higher mortgage payments.

first time home buyer

How can young investors qualify for a loan?

The biggest challenge for young investors is qualifying for a loan. The good news is that it is easier to qualify as an owner occupant than an investor. With current lending guidelines, you will need a steady job, good debt-to-income ratio, and good credit to qualify on your own. Many young investors cannot qualify for a loan on their own because they have bad credit, too much debt, or they do not make enough money.  There are options for those who cannot qualify!

  • Kiddie Condo loan: A kiddie condo loan allows relatives to co-sign on a property. The co-signors credit and income will help to qualify for the loan.
  • Regular co-signor: Depending on the loan program, any co-signor may be able to help with poor credit or income.
  • Seller Financing: Seller financing is when the seller of the home loans money to the new buyer. It is rare to find seller financing in my area, but it can be a great deal for both parties in certain situations.
  • Partners: Many investors are looking for a place to earn higher returns than a CD but want more security than the stock market. Real estate provides collateral, and some investors may be willing to loan money on real estate because it is safer than the market.

If you cannot find any options to qualify for a loan, you can still learn about investing and start working on qualifying. It is better to know as soon as possible what you have to do to qualify for a loan than to wait until you are ready to buy and find out you have to wait 18 months to get a loan.

Buying a multifamily home as a young investor

I like to buy single-family homes for a number of reasons, but mostly because they give me better returns in my area. It may make more sense to buy a multifamily property depending on your market and situation. Investors can buy a multifamily property as an owner occupant if it is 4 units or less and they occupy one of the units. You would have to live in one unit for a year, but you can rent out the other units as soon as you buy the property. In many cases, the rent from the other units will cover the mortgage payments and let you live in the property for free. Once the year is up, you can continue to live for free or move into another property and repeat the process.

Why is it harder for people to invest in rental properties when they are older?

Many people have a plan to invest in rental properties once they have become settled in life.

“When I have a great paying job, a family, and a nice house, I can use my extra money to invest in rentals.”

The problem is that the older we get the more responsibilities we have and the more money we spend. The nice house, nice cars, and family all cost a lot of money! We also have much less time than we used to because of a great job, a nice house, and the family. It is not a given that you will have a lot of extra money when you get older. However, rental properties are a great way to give yourself extra money when you are older without having to depend on a job to produce income. I love the cash flow my rentals produce, even though I make much more income from flipping.

Conclusion

Most people wait to invest in rental properties or to do any investing at all until later in life. Young people tend not to think about their future or feel it can wait to start building passive income. I think it is actually harder to invest later in life because we all have so many responsibilities, less time, and more to lose. The sooner you start investing, the better off you will be later in life, and we get older sooner than we think.

Source: investfourmore.com

I Just Bought a Seller-Financed Home With an 8.99% Interest Rate. Is That Legal?

Dear MarketWatch,

I recently bought a seller-financed home with the wholesaler sellers requiring that I take their seller financing at an 8.99% interest rate for a 30-year mortgage with the terms being I cannot refinance for one or two years unless I pay either a $6,000 prepayment penalty to refinance after one year and one day, or pay a $20,000 prepayment penalty if I refinance within one year.

This mandated seller financing package appears to me to be like subprime lending even though my wife and I have 750 and above credit scores and could qualify for today’s low mortgage rates.

I know the simple answer is to just walk away, however, my wife fell in love with this house and we just had to buy it, according to what she told me.

What government regulatory agencies protect buyers from such seller-demanded high interest finance schemes and how can I determine whether this “forced” seller-financed package breaks the law, or not, by using usurious interest rates? We are basically paying mostly all-interest payments and only reducing the principal balance by only about $1,160 during the whole first year. We paid $222,000 for the home, with a $44,400 cash down payment (20%) and financing $177,600 for 30 years.

Thank you very much for any insights on this “forced” seller-financing package.

Best regards and thanks for your articles,

“Trying to Live the Retirement Dream in Florida”

P. S.: Yes, I know this should have been a “walk away” deal, however, a Happy Wife makes for a Happier Life. So even though my mind said, “Walk away,” my heart said, “Buy it for the wife to achieve a happier life,” so we did end up buying it, hook, line and sinker!

Dear Retirement Dream,

It sounds like you’re taking the Sheryl Crow approach to life: “If it makes you happy, it can’t be that bad.”

I totally understand the desire to make one’s spouse or partner happy, especially when deciding something as important as where to live. But in this case it’s clear that your home purchase came with an unexpected feature: Buyer’s remorse.

Seller financing isn’t a common practice, but it is a legal one. And you came across one of the biggest risks associated with this route. Typically, sellers who finance the home sale charge a higher interest rate than a traditional mortgage lender would.

The seller is acting like a bank in this scenario — but unlike a bank or traditional mortgage lender, they may not be able to sell the loan or rely on other funds should you default on your mortgage. So, in turn, they’re charging you a higher interest rate to cover the risk they’re taking.

Why would a seller want this? The closing process can be faster when going this route, which can grease the wheels of the deal. Plus, sellers can see tax benefits and higher sales prices, because there isn’t necessarily an appraiser shooting down the value quoted.

You’re right that there are laws to prevent usurious interest rates. These laws vary from state to state. In Florida, for example, a usurious interest would be one that exceeds 18% on loans of up to $500,000 and 25% on loans above that amount.

“Lenders and borrowers must keep a watchful eye on the various factors that have the potential to make lending transactions usurious,” advisory and accounting firm Berkowitz Pollack Brant notes.

Prepayment penalties like the ones you agreed to — because let’s remember, you agreed to these terms — are also more common with seller financing.

My hope is that you negotiated where possible on the rate, terms and duration of the loan. Typically, buyers can benefit from seller financing if they have poorer credit. The debts may also not appear on your credit report, depending on the seller.

In most cases, sellers are subject to the same regulations as a mortgage lender if they finance the deal themselves, which is good news for you. But I hope you also did your own due diligence before taking the leap with this home purchase.

Yes, an 8.99% interest rate is high, especially by today’s standards. The 30-year fixed-rate mortgage averaged 3.05% for the week ending March 11. I trust you can afford the monthly payments for the next couple of years, at which point you should consider refinancing without the penalty. There’s no guarantee mortgage rates will be as low then as they are today, but you can feel fairly confident that they won’t be as high as the one you’re locked into.

In the meantime, enjoy the time with your wife and take pleasure in her happiness.

For more smart financial news and advice, head over to MarketWatch.

Source: realtor.com

I Just Bought a Seller-Financed Home With an 8.99% Interest Rate. Is That Legal?

Dear MarketWatch,

I recently bought a seller-financed home with the wholesaler sellers requiring that I take their seller financing at an 8.99% interest rate for a 30-year mortgage with the terms being I cannot refinance for one or two years unless I pay either a $6,000 prepayment penalty to refinance after one year and one day, or pay a $20,000 prepayment penalty if I refinance within one year.

This mandated seller financing package appears to me to be like subprime lending even though my wife and I have 750 and above credit scores and could qualify for today’s low mortgage rates.

I know the simple answer is to just walk away, however, my wife fell in love with this house and we just had to buy it, according to what she told me.

What government regulatory agencies protect buyers from such seller-demanded high interest finance schemes and how can I determine whether this “forced” seller-financed package breaks the law, or not, by using usurious interest rates? We are basically paying mostly all-interest payments and only reducing the principal balance by only about $1,160 during the whole first year. We paid $222,000 for the home, with a $44,400 cash down payment (20%) and financing $177,600 for 30 years.

Thank you very much for any insights on this “forced” seller-financing package.

Best regards and thanks for your articles,

“Trying to Live the Retirement Dream in Florida”

P. S.: Yes, I know this should have been a “walk away” deal, however, a Happy Wife makes for a Happier Life. So even though my mind said, “Walk away,” my heart said, “Buy it for the wife to achieve a happier life,” so we did end up buying it, hook, line and sinker!

Dear Retirement Dream,

It sounds like you’re taking the Sheryl Crow approach to life: “If it makes you happy, it can’t be that bad.”

I totally understand the desire to make one’s spouse or partner happy, especially when deciding something as important as where to live. But in this case it’s clear that your home purchase came with an unexpected feature: Buyer’s remorse.

Seller financing isn’t a common practice, but it is a legal one. And you came across one of the biggest risks associated with this route. Typically, sellers who finance the home sale charge a higher interest rate than a traditional mortgage lender would.

The seller is acting like a bank in this scenario — but unlike a bank or traditional mortgage lender, they may not be able to sell the loan or rely on other funds should you default on your mortgage. So, in turn, they’re charging you a higher interest rate to cover the risk they’re taking.

Why would a seller want this? The closing process can be faster when going this route, which can grease the wheels of the deal. Plus, sellers can see tax benefits and higher sales prices, because there isn’t necessarily an appraiser shooting down the value quoted.

You’re right that there are laws to prevent usurious interest rates. These laws vary from state to state. In Florida, for example, a usurious interest would be one that exceeds 18% on loans of up to $500,000 and 25% on loans above that amount.

“Lenders and borrowers must keep a watchful eye on the various factors that have the potential to make lending transactions usurious,” advisory and accounting firm Berkowitz Pollack Brant notes.

Prepayment penalties like the ones you agreed to — because let’s remember, you agreed to these terms — are also more common with seller financing.

My hope is that you negotiated where possible on the rate, terms and duration of the loan. Typically, buyers can benefit from seller financing if they have poorer credit. The debts may also not appear on your credit report, depending on the seller.

In most cases, sellers are subject to the same regulations as a mortgage lender if they finance the deal themselves, which is good news for you. But I hope you also did your own due diligence before taking the leap with this home purchase.

Yes, an 8.99% interest rate is high, especially by today’s standards. The 30-year fixed-rate mortgage averaged 3.05% for the week ending March 11. I trust you can afford the monthly payments for the next couple of years, at which point you should consider refinancing without the penalty. There’s no guarantee mortgage rates will be as low then as they are today, but you can feel fairly confident that they won’t be as high as the one you’re locked into.

In the meantime, enjoy the time with your wife and take pleasure in her happiness.

For more smart financial news and advice, head over to MarketWatch.

Source: realtor.com