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Understanding how owner financing works

On Behalf of | Dec 22, 2022 | Uncategorized |

Owner financing allows Connecticut buyers to purchase real estate outside of the traditional mortgage lending structure. With owner financing, a seller extends credit to a homebuyer, allowing the buyer to make a recurring payment directly to the seller.

In many ways, owner financing is similar to a mortgage loan offered by a financial institution, with the seller owning the debt instead of a bank. The owner and buyer will structure their own real estate deal based on the needs of both parties. This offers more flexibility for many buyers than what a bank is able to offer. Of course, not all sellers offer owner financing as an option.

Qualifying for owner financing

The seller decides on their own qualifications. With that said, in most situations, it is common for a buyer to have a downpayment of at least 10% to 15% of the purchase price in order to qualify.

While a credit check isn’t necessarily required for owner financing, many sellers will still want to do one. This is common with a purchase as large as one involving real estate. The seller themselves will decide what an acceptable income history and credit report will look like. Many buyers who choose owner financing have a poor or fair credit score. The considerable down payment helps offset these other factors for the seller.

Owner financing as a second mortgage

In some cases, owner financing serves as a second mortgage. For example, the buyer may qualify for a home loan of $200,000 at the bank. The home they wish to purchase costs $250,000. The buyer uses a combination of their $200,000 mortgage from the bank and a second $50,000 agreement with the seller to purchase the home. The mortgage lender will still have to approve this deal in order to move forward. If the seller is asking for more than the mortgage lender actually says the home is worth, the deal may not be able to go through.