Owner Financing vs. Conventional Mortgage: The Basics
Conventional mortgages can be better than owner financing based on rates, but often times, owner financing beats out conventional loans for other reasons. In this article, we’ll compare owner financing and conventional mortgages to help real estate investors, borrowers, and lenders save time and cash. Let’s dive into the key features of each financing option, exploring their benefits and drawbacks, and making an informed decision on which one suits your needs.
Understanding Owner Financing
Also known as seller financing, owner financing allows the property seller to act as the lender. Instead of a bank, the buyer pays the seller directly in installments. This method is popular among investors who might struggle with traditional mortgage requirements or want a faster closing process. Some of the factors we’ll evaluate with owner financing include:
- Closing fees
- Interest rates
- Credit score requirements
Unraveling Conventional Mortgages
Conventional mortgages are loans provided by banks or other financial institutions. These mortgages follow standard guidelines and are not backed by the government. They often require a good credit score, a sizeable down payment, and have strict documentation requirements. We’ll analyze conventional mortgages in terms of:
- Interest rates
- Credit score requirements
Comparing Financing Costs
Let’s compare owner financing and conventional mortgages in terms of their costs:
- Closing Fees:
- With owner financing, closing fees tend to be lower as there’s no need for bank fees or mortgage insurance. Conventional mortgages typically have higher closing costs, including loan origination fees, appraisal fees, and title insurance.
- Points, or loan discount points, are paid upfront to lower the interest rate on a conventional mortgage. This might not be applicable in owner financing deals, as the terms are more flexible and negotiable.
- Interest Rates:
- Interest rates in owner financing deals are generally higher compared to conventional mortgages, as sellers take on more risk. However, this can be negotiated between the buyer and seller, unlike conventional mortgages where rates are determined by the lender and market conditions.
Evaluating Loan Terms and Credit Requirements
Now, let’s take a closer look at the loan terms and credit score requirements for each financing option:
- Owner financing terms are often shorter than conventional mortgages, with balloon payments or refinance options at the end of the term. Conventional mortgages offer longer repayment periods, such as 15 or 30 years, with fixed or adjustable interest rates.
- Credit Score Requirements:
- Conventional mortgages typically require a higher credit score, as lenders want to ensure the borrower’s ability to repay the loan. On the other hand, owner financing is more flexible, as the seller may be willing to work with buyers who have lower credit scores or financial issues in their past.
Assessing Paperwork, Funding Time, and Regulations
Let’s consider the paperwork, funding time, and regulations for both financing options:
- Owner financing usually involves less paperwork than conventional mortgages, which require extensive documentation for loan approval. This can save time and reduce stress for both parties.
- Funding Time:
- Conventional mortgages may take weeks or even months to close due to the lengthy approval process. In contrast, owner financing transactions can close much faster, as they don’t require third-party approvals.
- Conventional mortgages are subject to strict regulations, while owner financing is more flexible. However, it’s essential to involve a real estate attorney and a Residential Mortgage Loan Originator (RMLO) to ensure compliance with the Dodd-Frank Act and other applicable laws.
Which Financing Option Saves Time and Cash?
When comparing owner financing and conventional mortgages, the former emerges as the winner for those who prioritize saving time and cash. Owner financing offers lower closing fees, less paperwork, faster funding, and greater flexibility. However, it’s crucial to evaluate the risks and negotiate terms carefully.
Alternative Financing Options
If neither owner financing nor conventional mortgages fit your needs, consider exploring other options such as portfolio loans and hard money loans. These alternatives cater to investors with unique financial situations and investment goals.
Now that you’re equipped with this information, which financing option will you choose for your next real estate investment? Share your thoughts in the comments below! We use owner financing quite frequently on all or some parts of our real estate investing deals.