If you’re trying to buy a house in Hawaii, then you’re probably aware of the buzz surrounding about every new house that hits the market. We put a house in Honolulu on the market just yesterday and there were already agents showing up after dark to get in before this morning’s broker open! Today’s home buyers need to do what they can to get the dream home or investment property they want.
But is getting a mortgage to buy a house the only way to get that dream home? Are there other ways? Well, you can always pay cash, but not everyone has $600K in their bank account just waiting to be plunked on a house.
Enter Owner Financing
What about “owner financing“? Also called “seller financing“, this form of financing leverages the existing equity in the current owner’s property. To put it another way, if the current owner of the house you want to buy has little or no debt (mortgage) on the property, then they have EQUITY. Equity can also be defined as the market value of a property minus the current debt.
For example, if you have your eyes set on a house in Honolulu worth $500,000 and the owner only owes $30,000 on the mortgage, then he has $470,000 in equity (excluding transaction costs).
So how does this help you buy a house?
Good question. Let’s say the seller doesn’t to waste time waiting for buyers to get qualified or the house has issues that might prevent a bank from issuing a mortgage. If he still wants to sell the house, he can ofter to sell it to you with owner financing.
In the above example, you buy the house in Honolulu from him for the agreed $500,000. At closing, his existing $30,000 mortgage is paid off. Forgetting fees for a moment (for the sake of example), you would then have a mortgage and note directly with the seller for the remaining $470,000. Instead of paying the bank every month, you pay the seller.
Benefits of Owner Financing
One of the great advantages of buying a home with owner financing is that you can skip the mortgage process completely. If you have difficult credit or if the bank won’t issue a mortgage, you can still buy the house using the existing equity in the property. Theoretically, you’re getting a loan from owner (where the term “owner financing” comes from ).
Another great advantage is that you can work out the terms directly with the seller. Usually you won’t have to pay any expensive origination fees (points), but you may end up paying a higher interest rate. It’s all in the negotiations.
However, just because it sounds easy, know that most sellers don’t want to worry about their buyer not paying the mortgage every month and having to come back to you or, at the very worst, foreclose. Most sellers won’t want to sell this way or, because of their existing mortgage, won’t have enough equity to make it even possible.
But for those instances were the debt is small or the house is free and clear and you can work out a good deal, then owner financing might be your ticket to your next Hawaii dream house!
PS — If you’re going to pursue this, make sure you have an attorney review everything!