Financing a House
When anyone decides to buy a house, there are two options: pay cash or finance the purchase. When financing a home, the borrower goes to the bank to GIVE a mortgage.
Yes, when you buy a property with financing, you give the bank an IOU (a mortgage) stating that you will make payments until the loan is paid in full. The bank pays the seller; the borrower gets the house. To ensure that the bank is paid in the event the house is sold or refinanced, a lien is placed on the property.
No Middle Man
A person must meet minimum qualifications to get a loan from a bank. Income, credit, job history, and the property all come under scrutiny before the bank agrees to extend a loan.
What if the potential homeowner is self employed or has a credit score a few points less than the bank's minimum requirements? What if the property value and sale price are too low for the bank to even consider a mortgage? Seller financing is very helpful in these situations.
When the bank cannot or will not extend a loan to a borrower, owner financing can be a great alternative. This means the seller of the property is agreeing to take payments directly from the buyer instead of a lump sum of cash from a third party lender.
When borrowers can buy a home without waiting several weeks on a bank to decide to lend money, it can be very beneficial for them as well as the neighborhood. There is one less vacant property, the house is being maintained, taxes are being paid and the borrower gets to reap the benefits of home ownership.
The monthly payment, unlike rent, will be the same, and the borrower can take advantage of the equity that builds over time. The property is theirs. If they want to paint, get different shrubs, add a bedroom or redo the kitchen, they don't need to check with the landlord because there isn't one
While the borrowers make payments and enjoy home ownership, the seller is now a note owner. The loan the property seller created is an asset just like a rental property. Every month, the seller gets paid just like a landlord. However, the note owner is not responsible for maintaining the property, nor do they have to pay taxes or hazard insurance on the property.
The house is no longer the property of the note owner. He or she has exchanged a physical asset (the house) for a paper asset: a stream of payments in the form of a note. This asset is typically secured by a mortgage or deed of trust depending on local foreclosure laws. These security agreements protect the note owner; if the borrower defaults, the property goes back to the lender..
Exit Strategy for Note Owners
Now that the seller has this monthly stream of income, what can they do with it should they need a larger amount of cash? Can they go back to the borrower and demand the rest of their money? Perhaps they can go to the bank and cash in their note like a check. Unfortunately, a note is not like a check or bank certificate of deposit that can be cashed in when the owner feels like it. This paper asset can be sold or borrowed against, should the note owner need a lump sum of cash. The person buying the note has now switched places with the former note owner and collects payments. The new note owner cannot change the original agreement, but can sell the note to another investor or collect payments until the loan is paid in full. When created correctly, a seller financed note can be a valuable and profitable asset to a note owner and a note buyer.
Find out what notes can do for you.