Under our Buyer Investor Match program, we help credit-challenged home buyers realize their homeownership dream with owner financing. Our clients are those who have been turned down by conventional lenders due to a low credit score, lack of social security number, non-verifiable income and several other such reasons. Since owner financing is the foundation of the entire program, we are asked a lot of questions about how it works and how it is different from a conventional mortgage. We come across many misconceptions about owner financing, particularly about how mortgage payments are calculated.

The reality is that owner financing – also known as seller financing – is a very straightforward and simple financing arrangement and in fact, a lot less complicated one compared to a conventional mortgage.

How mortgage payments work in an owner financing arrangement

In an owner/seller financing arrangement, the home buyer borrows from the seller, instead of a conventional lender. In our Buyer Investor Match program, you will borrow from an investor. It means that an investor from our network will buy a home of your choice and resell it to you usually on the same day.

Here is what owner financing looks like when compared to a conventional mortgage:

• Collateral: You will put the property as collateral when taking out a mortgage from a conventional lender such as a bank. The same happens when you borrow from an investor in an owner financing arrangement.

• Promissory note and deed of trust: When taking out a mortgage from a bank, you will sign a promissory note and a deed of trust. The promissory note will specify the amount of monthly payment, length of time, interest rate and late fee charges, while the deed of trust will empower the lender to seize your property if you default on your loan. You sign both the documents when buying a home in an owner financing arrangement. Related article: What is a promissory note and how does it work in owner financing?

• Payments: You make the payment directly to the lender, while in an owner financing arrangement, a note servicing company handles the payment. The company ensures that both the parties comply with the terms and conditions specified in the promissory note.

• Interest rate: In an owner-financing arrangement, the interest rate is slightly higher than that offered by a conventional bank. The reason is that the investor is tying up his or her credit when lending you money. While it’s a hassle free way of making money for the investor, you get to realize your homeownership dream just by paying a few dollars extra every month. While taking out a mortgage from a bank, you have the option of locking in the interest rate. The same is true when borrowing from an investor under our program. You won’t get affected by any fluctuation in the interest rate in the future.

• Amortization period: It’s the length of time by which you are required to pay off the debt. Conventional lenders offers an amortization period of up to 30 years, while owner financing is a short term loan in general, buyers can enjoy the same amortization period of up to 30 years under our program.

• Refinancing: Let’s say for example you took out a fixed rate mortgage from a conventional lender at 5% interest rate. In a few years, the rate comes down to 4%. You can refinance this loan any time so that you pay the new 4% interest, instead of 5% you committed to when taking out the loan. One of the best advantages of our owner financing program is that you can refinance any time you want just like you can in a conventional home loan arrangement. You are buying with owner financing because you are facing credit-challenges, right? By making your monthly payments on time, you can rebuild your credit and easily refinancing your loan in a few years. It’s because the note servicing company will report your payments to the credit bureau, which will boost your credit score. Related article: Refinancing your mortgage in owner/seller financing: Is it possible?

• Private Mortgage Insurance (PMI): You need to pay PMI in addition to the principal and interest amount if you put less than 20% down. It protects conventional lender in case you default on your mortgage because they are taking a risk by approving a mortgage with a low down payment. Under our program, you don’t need pay any PMI because we already have a minimum down payment requirement when helping credit-challenges individuals buy home with owner financing. You need to put a minimum 15% down payment.

• Real estate taxes and insurance payments: Most lenders set up an escrow account where your payments for real estate taxes and homeowner’s insurance are deposited and paid to the local tax authorities and insurance agency respectively whenever due. While these payments are usually due once in a year, you are required to pay them monthly as a part of your mortgage payments. The portion of the payment for insurance and tax is held in an escrow. The same thing happens when you buy a home with owner financing under our program. We believe that it’s easier to pay taxes and insurance monthly as you go instead of getting a big bill at the end of the year. When you sell or refinance the home you get your escrows back so it’s like having a savings account.

In conclusion

Obviously, the only significant difference between owner financing and a conventional mortgage is in who you are borrowing from. Everything else is almost the same. It is for this reason that owner financing is a great option for anyone struggling with credit challenges.

Interested in learning more about our program? Click on the ‘GET STARTED’ button below to set an appointment with us using our online scheduler: