Owner Financing: How To Reduce Your Risk

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Offering owner financing for the sale of your home can be a scary proposition, but there are ways to reduce your risk.

Offering owner financing to a potential buyer of your home can provide you with an alternative for moving your property in a slow market. Before entering into any agreement, however, you need to do your research by learning the basics of what owner financing entails and how it might benefit you. Owner financing isn’t without its risks; however, but there are ways to help protect yourself both financially and legally.

Thoroughly review the buyer’s information.

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Financial institutions perform a vigorous review of a potential buyer’s financial and personal background and so should you. Verify employment records, financial assets and stability, credit scores, references and other relevant information.

Prepare the purchase contract carefully.

There are several different types of owner-financing loan arrangements. While any of these loans will work, be sure to include a deed-in-lieu-of-foreclosure clause in your contract with the buyer, along with the amount, interest rate and terms of the loan. This clause enables you as the seller to take the property from the buyer if payments aren’t made in a timely manner. In addition, the contract should state that the home sale is contingent upon approval of the buyer’s financial information.

Require a down payment.

Down payments help reduce the risk of default on the loan. The theory is that if a buyer already has money in the property then he or she feels more invested in the property and is less likely to default. And, if the buyer does end up defaulting, then you as the seller already have a nice chunk of change to help cushion any financial distress it may cause you as you work to take back the home from the buyer (thanks to the deed-in-lieu-of-foreclosure clause that you included in your original contract).

Get professional help.

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Just because you’re offering owner financing rather than requiring a traditional loan doesn’t mean you’re on your own. There are plenty of knowledgeable professionals and dedicated services you can turn to for assistance.

  • Sites like Bankrate.com can provide you with daily and weekly interest rates to help you determine what interest rate you should charge the buyer. (Just be sure to check regional rates rather than national.)
  • A title company can perform title searches, provide title insurance and help determine how much it will cost to record the mortgage—a cost typically passed on to the buyer in the form of closing costs.
  • A loan servicing company can help you draw up the contracts and administer the mortgage.
  • And an attorney, financial advisor and real estate professional can all provide you with advice, assistance and the appropriate paperwork for your arrangement.

This article contains general information. Individual situations are unique; please, consult your financial advisor or attorney before utilizing any of the information contained in this article.

Source: Realtor.com, MortgageFit.com, Nolo.com, Associated Content, NuWireInvestor.com, Bankrate.com
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