Many Florida home sellers are offering incentives to buyers to purchase their property such as 100% owner financing or carrying a second mortgage. For a seller who does not need all the cash upfront from the sale of his or her home, owner financing increases the pool of buyers that may be able to buy the seller’s property. There are a large number of buyers who can afford to make the mortgage payments, but either do not have perfect credit or a larger enough down payment to qualify for traditional funding. Also, the seller may be able to sell the home for more money because the seller is accommodating the buyer by financing all or a portion of the transaction.
The buyer gets to move into the home and receives all the benefits of home ownership. The buyer can refinance the home and pay off the seller at a later date when their credit or financial situation improves. Or if the buyer qualifies for a smaller first line mortgage, they can obtain a second from the owner. Owner financing gives the borrower more flexibility. The seller gets the opportunity to sell a home that may have on the market for awhile which they are having a hard time selling.
Making an Offer on Owner Financed Homes in Florida
When you make an offer on an owner financed home, the buyer and seller must negotiate the owner financing in the contract so that the payment terms of the purchase are clear to all parties, and the escrow, title and closing agent. With 100% owner financing, the owner holds the note, and the buyer makes the payments to the owner instead of a financial institution. Legal title will be conveyed to the buyer at the time the note is paid off, which is basically the same as a first lien mortgage transaction with a bank. The buyer gets physical possession of the home and home ownership benefits. The buyer can move into the home quickly.
When the seller finances the second mortgage, the seller subordinates to the first lien mortgage holder. Seller financing on a first or second may be short term such as five years. When the seller carries the second, the buyer makes payments to both the first lien mortgage holder, who is generally the bank or other financial institution, and pays the second lien holder, the seller directly on the second mortgage. When the buyer pays off the second, the buyer will only have one mortgage that they owe to the first lien lender. Or if the seller is financing the transaction 100%, the buyer will obtain traditional financing from a bank and pay the seller off later.
What Sellers Should Know
The seller should have the note recorded to protect them and maintain their priority against other lien holders. Also, there are risks involved with seller financing because the buyer might default. Even if the seller takes the home back, property prices may fall, and the home may not be worth what the seller sold the home to the buyer for in the original transaction. Now the seller is stuck with a home that is worth less money. Before entering into seller financing, the seller should consult with a real estate attorney and have the attorney draft the note and other legal documents. The attorney can also explain the advantages and disadvantages of seller financing to the seller.
What Buyers Should Know
If the seller is providing a second mortgage, the mortgage is generally for a short term such as five years. You will need to pay off that mortgage at that time. If you default on the first or second mortgage, the first and second lien holders will negotiate amongst themselves to foreclose and sell the house. The sale proceeds will be used to pay off the liens. So before you decide to purchase a home and take out a first or second lien, whether you qualify of for traditional financing or not, you better have a plan on how you are going to pay the loan back otherwise you risk your investment and the home goes to foreclosure.
The popularity of owner financed homes in Florida is predicted to increase as traditional lending guidelines make it harder for borrowers to obtain loans. Sellers and buyers should proceed with caution when deciding to enter into a seller financing contract and consult with legal advisors first to make sure the decision is the right one for their financial situation.