Vendor Financing for a For Sale By Owner
- Mortgage agreement - own the deed
- Land contract - do not own the deed
- Rent to Own - pays rent
- Advantages/Disadvantages of Seller Financing
Vendor Take Back Mortgage
This mortgage agreement is designed for the seller to "take back" or provide a mortgage on the house. You, the buyer sign a mortgage agreement which outlines the terms and conditions of the mortgage (allowing the seller to for close if you fail to pay). In return the seller transfers the Land Title into your name. You now have all the rights to the property including the right to sell or refinance. And the For Sale By Owner seller has a first mortgage on your home, which means if you default on payments he has the legal right to take the appropriate action.
Sometimes the buyer needs a lesser amount to complete the sale. In this case the seller may grant the purchaser a second mortgage at a higher rate in order to assist the buyer in completing the sale. This is more common than the above example.
In some cases a land contract is used instead of a vendor take back mortgage. The difference is in a Land Contract; the title of the property does not transfer to the buyer until the full price is paid. Because the seller keeps the title over the life of the loan, you cannot sell or refinance the property until all payments are made.
In some cases the FSBO seller has a mortgage of his own on the land and without paying it out, he is unable to make the deal with a buyer in any other form if seller financing is the primary lender.
In this situation the buyer agrees to pay the original mortgage payment (already in place) plus an additional payment, which constitutes the remainder of the purchase price.
FSBO Seller Financing
Vendor (Seller) Financing used to be very popular in the late 1970's and early 1980's. At the time interest rates were high and landowners could propose their own rates and terms on the contract offered to purchasers.
For Sale By Owner Sellers offer such options as:
- Land contracts
- Rent to own options
Sellers would agree to loan a buyer, part or all of the money needed to buy his property. Some sellers did this to create a sale on a property that was just not moving and others did it for tax purposes (receiving smaller payments or a long period of time instead of a lump sum).
In today's market some sellers are bringing this option back to life as long-term investments in the form of Take Back Mortgages, which provide higher yield on their investments by receiving their equity with interest.
For Buyers, substantial savings in closing costs is an attractive feature. Possibly saving CMHC or Genworth Mortgage Insurance is enticing enough but look deeper into this topic.
Rent To Own
Basically the way this works is:
Standard rent is established at market value, so the rent normally charged for this home is established first. Let us say it is $1000 per month. You now negotiate a price above the standard portion and that portion is collected each month and saved until you have enough for the down payment.
Your standard rent is $1000/monthly
You agree to pay $1250/monthly
So $250 is saved each month towards your down payment.
The landlord holds this money and the agreement and terms including termination should be addressed in the contract.
After the additional funds have accumulated into the amount needed for the down payment. An Offer to Purchase is drawn up and you are to seek financing arranged by the original contract or through a Financial Institution. Be sure the details of such arrangement is clearly written and checked by legal counsel.
Advantages to Seller Financing
- Savings in closing costs
- Free negotiations on interest rates and terms
- Free negotiations on repayment schedules and penalties
- Special conditions can be implemented
- Trade items can be used (if seller/buyer are willing) such as vehicles, motor homes, tractors, etc.)
- Borrower does not have to qualify as with an underwriter
- No CMHC or Genworth insurance charges
- Faster possession date
- Seller receives interest on investment
- Less capital gains (smaller sums over a long period)
- Possibility of a higher sale price due to sales conditions and terms.
Disadvantages to FSBO Seller Financing
- The buyer could make regular payments to the seller but the seller might not make the payments to the original loan causing foreclosure.
- Buyer may not have gotten a home inspection or appraisal and can be committed to a home not worth of the payments he has agreed to.
- Buyer may not be aware of additional easements, right of ways, or charges against the property.
Solution: Seek legal counsel before considering this type of purchase to help eliminate these types of disadvantages.