Disclaimer: This method is intended for people with terrible credit who are all out of options. If you’re tired of wasting your money on rent payments and you are unable to obtain traditional financing then this may be the best option for you.
*This information is not financial or legal advice. It is for entertainment purposes only*
Everyone loves the thought of home ownership. Unfortunately, many people don’t think this will ever be a reality because they can’t see past their poor credit score.
Behold, here’s one simple method to get a chance at home ownership.
The method is: Owner Financing / Seller Financing
Owner Financing gives you the opportunity to remove the bank or lending institution from the buying process.
Instead of applying for a loan from the bank, go directly to the owner of the Property
and convince them to act as the bank.
What I mean is, instead of making monthly mortgage payments to the bank you will be making monthly mortgage payments to the owner of the property.
Simply, record a land contact with the county clerk and voila, you’re a home owner! The property will remain in the sellers name until the loan is satisfied. Once it has been 100% paid off, make one more trip to the county clerk’s office and have the deed transferred into your name.
The reason why this is a favorable option for you is because property owners are not as strict as banks.
The property owner is not going to require you to go through all of the red tape like a bank would.
Although each property owner is different from one another, this method you will have an opportunity to hold a regular conversation with a property owner that could potentially turn into an APPROVED loan.
Remember, property owners are people. No more, no less. All they really want is a fair offer for their home and a nice family to move into it.
Most home owners have positive memories and emotions attached to their house. Therefore, if they meet a nice, hard working, honest family who makes a decent offer on their house, there’s a high probability that they will say yes.
Note: I never mentioned anything about showing them your credit report, your work history, or references.
All I said was with a simple conversation and hand shake to could Purchase
And this my friend is how simple it is. I’ve personally done this several times and it works! Not to mention, I didn’t show a single pay stub or credit report to make the purchase.
Now this method won’t work with everyone, however it does work. You just have to find the right seller.
I broke the process into 8 steps.
Here’s how it goes:
Step 1. First things first, get your finances in order.
Do this by calculating how much you can afford to pay each month towards the property. Be sure to factor in taxes, insurance, water and utilities. Next determine how much of a down payment you can put towards the purchase.
You can make your life a lot easier by using a mortgage calculator.
Once you have determined your monthly budget, down payment, interest rate and the purchase price of the property you can now move on to the next step.
Step 2. Search for properties.
Before you begin your search it’s important to know that properties are listed for sale by different people.
They are listed by: Realtors, banks, home owners and government organizations.
This method will ONLY work with properties listed by home owners.
The reason why it won’t work with a realtor is because the Realtors work on commission and their commission usually becomes an issue during the buying process. Because of this the Realtor will probably try convincing the owner not to accept your offer.
Therefore, when you’re searching for houses go directly to the properties that have a sign that state “for sale by owner”. If you’re searching online, type for sale by owner in the search bar. This will allow you to easy filter the listings.
Step 3. View the property.
Contact the property owner and schedule a viewing. It’s up to you if you want to mention that you plan on using owner financing to make the purchase.
If you do decide to mention it over the phone, simply ask the seller “would you consider owner financing?” If they say yes, just leave it at that and set the appointment. You can work out the details later.
Step 4. Make an offer.
Obviously, this would be after you have viewed the property and have decided that you want to move forward.
Note: Your offer can be whatever you choose. Meaning, it may include you putting a down payment or it may not. It may include you paying interest on the loan or it may not.
Remember, it’s all negotiable. Just be sure to keep it simple.
For example, the property could be listed for $70,000 and your offer could be $75,000 with $5000 down for 10 years at 0%, totaling $584 per month.
Will the owner say yes? Who knows? The idea is, you got the ball rolling. Now all that is left to do, is a little negotiating.
Step 5. Write a contract.
Once the terms and conditions have been worked out, it’s time to get it in writing. Have your attorney draw up a contract that states the property is being sold via “land contact or contract for deed”. Be sure to include the payment terms and conditions in the contract.
It’s important to know that even though you assume responsibility for the maintenance of the property, the seller is still responsible for it as well. In order words, if the gutters on the house are falling apart and the city posts a violation on the door, the seller is still held accountable if you don’t fix it.
If you fail to keep up with a maintenance of the property, the seller has a right to take the property back.
Don’t forget, it’s in your best interest to maintain the property, so this is really no big deal. Think about it, why would you not want to fix your own gutters?
Note: The seller will still be responsible for the property taxes as well.
Step 6. Cross your t’s and dot your i’s.
Once the paperwork is in place the next step is to do your due diligence.
Do a proper title search on the property. Make sure that there are no liens on the property. Confirm that the seller is the actual owner of the property. Check to see if there are any back taxes or past due water bills. Have the property inspected as well. (Roof, foundation, heating system, electric, plumbing, mold, and so on.)
Step 7. Closing
This is the part when the final paperwork is going to be signed by both parties. The down payment and the keys to the property will be exchanged as well.
Once you complete the closing, you are now free to celebrate. You are officially a home owner!
Step 8. Finish line
This last step consist of the following:
- Making your monthly payments until the end of the agreed terms.
- Maintaining the property throughout the agreed term.
- Transferring the deed of the property into your name once the terms of the contract have been satisfied.
That’s it! Once this is all done the property will be 100% in your name and 100% paid in full.
Time to celebrate once again. You did it! You purchased a house with terrible credit and paid it off.
Owner financing vs Rent-to-Own / Lease-to-Own
I felt it was necessary for me to include this comparison between those terms, so you can understand the difference.
Rent-to-Own / Lease-to-Own is NOT Owner financing.
Here’s how it works: Rent-to-Own / Lease-to-Own is when the seller agrees to rent/lease the property to you for specific time frame. The seller will then apply a portion of your rent/lease payment towards the price of the property. Lastly, when the lease is up, you will now have an opportunity to purchase the property at the new lower price. Here’s the catch, you still have to obtain a loan from a bank to purchase the property.
What the seller will tell you to do is to work on repairing your credit throughout the term of the lease, so when the lease is up you will be able to qualify for a bank loan.
Here’s an illustration:
- Purchase Price $100,000
- 3 year Term with option to buy
- Rent-to-Own / Lease-to-Own, Monthly Payment $1,000 ($200 goes toward the purchase price and $800 goes in the sellers pocket)
- After 3 years of rent/lease payments you will have a $7,200 credit towards the purchase price. ($200 * 36 months)
- The new purchase Price is $92,800Whoopty doo!
And guess what? Now you have to obtain a bank loan. If you are unable to get approved for the loan the seller can now sell or lease the property to someone else.
Worst of all, the $36,000 you spent in rent/lease payments are lost.
Owner financing is much different. Here’s how it works:
First, you and the seller have to agree on the purchase price and the terms of the loan.
Next is to fulfill the terms of the agreement.
Once you’ve done that the house is yours.
Here’s an illustration:
- Purchase Price $100,000
- 10 year term
- 5% interest rate
- $5,000 down payment
- Monthly Mortgage payment: $1,007
- After 10 years of making payments the property will be 100% paid off.
- No bank loan is required.
Now you tell me, if you had terrible credit, which option would you choose?
It doesn’t really matter, the point was to just show you the difference between to two options Rent-to-Own / Lease-to-Own and owner financing.
Note: There are many people that are advertising owner financing, but when you discuss the terms you discover they are really offering Rent-to-Own / Lease-to-Own.
Know the difference.
Important things to know:
- Owner financing is not available in every state and the laws vary, so check with your county to see if it is accepted.
- Owner financing works best on properties that are under $100,000 and terms that are 10 years or less.
- The property that you are purchasing should not have an current mortgage on it. It should be paid off. However, if the owner still has a mortgage balance, you can still proceed with a contract for deed, but expect more complications. You’re better off finding another property.
- Please seek advice from a licensed professional before making a purchase.
Written by Ivan Maldonado
Author of Head Start 2 Riches