What is owner financing?

October 15, 2014 01:15

In a perfect world, like in the movie It's A Wonderful Life, people would contact the local bank, and the local bank would give them a loan to buy a house, even if their credit were less than perfect.  But alas, we do live in a perfect world. If you want to buy a house, in most cases you have to get a loan. If you want to get a loan to buy real estate, you have to jump through a lot of hoops to meet the bank's criteria.  Banks have a huge amount of power over the average home buyer.

Most banks do not hold their own portfolio of loans. The re-sell them to other investors, Fannie Mae (FNMA) and Freddie Mac guidelines represent the gold standard for residential home loans. I may ask a mortgage broker to expand on the details of Fannie Mae and Freddie Mac guidelines, but I imagine that this would be a massive blog post. First you have to have income that can be documented. Second you must have a certain credit score. Third you must have certain ratios pertaining to debt to income and/or mortgage payment to income. Fourth you need to be in the same line of work for a couple of years. These are just a few of the criteria that need to be met in order to get a FNMA loan.

What do you do if you have income that is difficult to document? Maybe you have a source of income that comes from a foreign country. Maybe you work from home. Maybe your income is seasonal. What if your spouse or partner has an income that can not be counted under FNMA guidelines because of length of employment. Maybe your spouse or partner has credit issues so putting them on the loan would make things worse?

In these cases, and a multitude of other cases, you need Owner Financing. If an owner wants to sell a house, they can take a reasonable down payment of say 20%. Offer a reasonable interest rate of say 6%, and not have to dive into all of the financial details that are associated with FNMA. Of course a seller who offers owner financing would definitely want to know the buyer's credit score or know a bit about the corporation making the purchase, but a seller who can offer owner financing can take the time to look at the details of the individual buyer; whereas FNMA guidelines are cookie cutter guidelines designed to eliminate buyers who they perceive as risky. In other words, it looks to me like FNMA does not want to loan money to entrepreneurs (risk takers).

I have a client who wants to buy a property. He could easily put down 50% of the purchase price, but he does not qualify for a bank loan because his income is difficult to verify. It is seasonal, unpredictable and it comes from multiple sources. FNMA wants to see a paycheck. This client is an ideal candidate for owner financing.

Another case for owner financing occurs when the property does not meet "The Man's"... I mean the "The Bank's" financing guidelines. Did you know that a bank will not make a loan on a property that is missing handrails... really? What if the house is a fixer? No again. What about condos that are suing the contractor or builder... sorry. What about a condo that has more than 30% of the units as rentals... too bad.

As you can see, due to current Fannie Mae guidelines, a lot of buyers and properties get black balled by banks. These buyers and properties need owner financing. Owner financing is the missing link in real estate, and more sellers should consider it.