Owner-assisted financing in real estate: points to consider

How can you make your home ownership dreams a reality if you don't have enough money for a down payment or don't have a great credit rating? Owner-assisted financing is one option.

Owner-assisted financing can be a viable route toward owning your own home. However, it's important to understand both the good and bad things that come along with the process.

What is owner-assisted financing?

Typically, home buyers get a mortgage for a new home from a bank. That's generally how sellers want things to happen, as well, since that means the seller gets all their money immediately.

With owner-assisted financing, the seller takes the position of the bank and extends the buyer credit. The buyer will then make payments on a set schedule, have a promissory note and a contract spelling out both what will cause a default on the loan and the consequences of defaulting.

What are some of the most important things to know about owner-assisted financing?

Typically, the seller will insist on a balloon mortgage. The buyer will be allowed to make regular payments on the mortgage for several years, with the requirement that they obtain regular bank financing at the end of that period.

This is often a way to overcome the buyer's financial limitations. The monthly payments are taken (wholly or partially) as down payments that can later be shown on the application for the bank loan. Most people can manage to overcome credit problems within a five-year period well enough to qualify for a bank loan (even after a bankruptcy).

However, owner-assisted financing is not without its perils. If, for example, the owner still has a mortgage on the property, you could get into a complex legal situation if the owner defaults. You also take on all of the responsibilities of home ownership, including taxes, insurance and maintenance, without necessarily having a clear title to the place until after you obtain regular financing.

In addition, sometimes sellers only offer this kind of financing when they're desperate to sell. This means you may be paying too much for the property.

If you're considering owner-assisted financing, it's smart to get legal advice on any contract and promissory note you're about to sign. You don't want to overlook a serious issue in your haste to grab a good deal.