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Approaching a bank for a mortgage loan to cover a down payment or the entire purchase price is an option often considered in the process of purchasing a home. However, sometimes you may not be eligible for a bank loan for various reasons, including a poor credit report because of default in payments, or lack of sufficient income to qualify for the required loan amount. For those in such situations, there is another option called owner financing or seller financing. Owner financing is where a person putting up his house for sale offers a part of or the entire purchase price to the purchaser as a loan in order to help the purchaser. This purchase money mortgage offered by a seller to the buyer is conducted with the intention of luring the buyer.
In the process of owner financing, a seller may or may not impose a mortgage on the property. It is usually in cases of sale by owner, not where an agent or broker is involved, that the benefit of owner financing is offered. The seller offers a loan to the buyer as an incentive. There are no banks involved in the process, and the deal is directly between the seller and buyer. The terms of the loan are noted in a promissory note, also called a mortgage note or trust note. The promissory note and contracts involved entitle the buyer to possession of the property, however, the actual legal title may be transferred only after the entire payment is made. There are three ways of performing owner financing:
The primary benefit of an owner financed purchase is that you have the opportunity to purchase a home even if you are not eligible for or cannot afford a bank loan. This process helps you avoid cumbersome loan processes and close the deal in a few days' time. The flipside is that many sellers offering their home for sale are probably in need of money themselves, may not be aware of this method, or unwilling to take the financial risk.