Buying a dream home comes with various challenges, whether the high price tag or loan approvals. With home prices rising in Illinois, finance remains a huge problem for many. But there is an excellent alternative to buy your dream home – Owner Financing.
However, Illinois owner-financed homes can be a complex agreement that can get confusing. We are here to make things easier for you!
Let’s take a deeper look at owner financing, how it helps you, and various deal structures.
What is owner financing?
Owner financing, also known as seller financing, lets you buy a new home without relying on mortgages. Instead, the homeowner (seller) will be the one who finances the entire purchase. In general, you’ll be paying higher interest rates than current mortgage rates. Furthermore, you might be required to pay a balloon payment at the end of a loan term.
How does owner financing work?
While a traditionally mortgaged home involves banks and other financial instruments, these aren’t involved in a seller-financed sale.
Both the parties are required to draw up a promissory note with a properly structured interest rate, schedule of payments from buyer to seller, and the penalties buyer can face without completing those obligations. Unlike a mortgage sale, there is no principal transaction from the buyer to the seller but just an agreement to repay that sum over decided intervals.
The best part of owner financing is that buying and selling a home is much quicker, with only two main players involved. You’ll not be draining your time and energy in waiting for bank loan approvals, underwriter, legal department, etc.
Structuring an owner finance deal
Buying an Illinois owner-financed home is a written agreement between buyer and seller. Although there are different approaches to structure a deal, one can proceed according to their requirements and circumstances.
Take a look at the three main ways to structure a seller-financed deal:
PROMISSORY NOTE AND MORTGAGE/DEED OF TRUST
This model is familiar to those who are experienced in traditional mortgages. Here, both the buyer and seller agree to the terms of a promissory note which contains details such as:
- Loan amount
- Interest rate
- Amortization schedule
The mortgage is often secure or collateralized by the house. The agreement’s title has the buyer’s name, and the mortgage is recorded with the local authority.
CONTRACT FOR DEED
Here, the buyer wouldn’t be receiving the deed to the owner-financed property until he completes the loan payment. Therefore it is also known as an instalment sale or land contract.
To be more precise, the buyer can only receive the title if he refinances the loan with another lender and pays the seller in full.
This method involves a seller leasing a property for a specific term to a buyer. As the buyer pays rent in intervals and reaches the end of the term, he can purchase the property or give up that lease system.
If the buyer opts to buy Illinois cheap homes, the sum of the rent paid during the lease period is deducted from the purchase amount. This kind of agreement is also known as a rent-to-own or a lease option.
ADVANTAGES AND DISADVANTAGES OF OWNER FINANCING A HOME
Advantages for sellers:
- You can spread out capital gains over taxes over time.
- An excellent way to earn passive income regularly.
- Ease the selling of your property, especially in a crowded housing market or in situations where you are struggling to sell your property.
- If the buyer stops paying, you can get the home back and keep any down payment and money received during the period.
- You can enjoy the freedom to set your terms.
Disadvantages for sellers:
- Finding an eligible buyer can be complicated and time-consuming.
- You need a professional underwriter to ensure legal compliance.
- During foreclosure, you have to incur costs of repairs, renovation, etc. Also, foreclosure is a complex procedure, and it’s often hard to make people buy a foreclosed home in Illinois.
ADVANTAGES AND DISADVANTAGES FOR BUYERS
Advantages for buyers:
- You can complete the buying process much faster than traditional mortgaging.
- Let’s you finance homes that you don’t qualify for conventional financing
- No mandatory down payment.
- Reduces the cost of closing (no appraisal costs, bank fees, inspection costs, etc.).
Disadvantages for buyers:
- Higher interest rates.
- You might be required to pay a balloon payment at the end of the loan term.
- The seller might analyze your creditworthiness and refuse owner financing.
- Due On Sale Clause. This means that if you are buying a property on which the seller has a mortgage, you are responsible for paying it off.
Owner financing can be complex. Thus, we recommend contacting real estate company to consider your best interests while buying or selling a property. At Auction Flippers, we buy, sell, and auction Illinois cheap homes. Our Illinois Real Estate Auctions lets you place a bid as low as $1.00!
Get in touch with us to get one step closer to your dream home!
At Auction Flippers, we buy, sell, and auction Illinois cheap homes. Our Illinois Real Estate Auctions lets you place a bid as low as $1.00!