Houston owner financing basics: How do monthly payments work?
Are you planning to buy a home with owner financing in Houston TX? If your answer is yes, you must be wondering how your financial obligations will be different from those in a conventional home loan program. How will your monthly payments differ in owner financing?
Your concerns are justified as buying a home with an alternative financing method such as owner financing is a big decision. The good news is that owner financing payments are no different from mortgage payments. They consist of all the usual components including principal and interest.
Let’s discuss in detail how monthly payments work in owner financing:
Owner financing is a secured mortgage
You put the property that you are buying with a conventional mortgage as collateral, right? The same happens when you buy with owner financing. You will need to make your payments on time. Any missed payments will affect your credit, just like they do in a conventional mortgage. You will get reminders and notices if you are delinquent and will run the risk of losing your home in extreme cases. In other words, owner financing is a secured mortgage.
How is your repayment plan determined?
You sign more or less the same types of documents in owner financing. The most important documents – specifying repayment detail and terms of the financing contract - are promissory note and deed of trust. In a recent article, we discussed the difference between these two documents. Promissory note contains your promise to repay the loan and the repayment terms, while deed of trust outlines the consequences of default.
How are your monthly payments handled?
In our program, a note servicing agency processes your payments. You will make payment to the agency. The seller or the investor who owner financed the home to you gets his or her payments from the agency. The note servicing agency is also responsible for sending reminders and notices to the borrower for missed payments. The agency charges a nominal fee – usually a few dollars a month – for handling owner financing payments. It makes the payment process smooth and hassle-free for both the parties.
How is interest rate calculated?
Different owner financing programs offer different arrangements with regard to interest rate calculation. We help our clients learn how they can benefit from a fixed-rate owner financing program. It means that you make fixed rate interest payments over the entire life of the loan. In a variable rate loan, the interest rate can go up or down.
How long do you pay?
People believe that you have to make a balloon payment in owner financing and it is a short-term loan. While the terms in your contract dictate whether or not you will need to make a balloon payment and how long the amortization period will be, we – here at Shop Owner Finance – help you learn how you can get owner financing with an amortization period of 30 years. In a conventional mortgage arrangement too, you can get a 30-year-loan. In that respect, owner financing is no different from a traditional home loan.
What if you want to prepay?
What are the consequences of prepaying your loan? Will there be any penalties? It’s an important thing to consider when committing to an owner financing contract.
In our training program, we help home buyers learn how they can negotiate an owner financing contract so that they don’t have to pay any pre-payment penalties. You may want to prepay your owner financing loan if you are refinancing with a conventional mortgage. Refinancing is possible in owner financing. In fact, all our credit-challenged clients are free to prepay their loan and refinance with a traditional lender after their credit situation has improved.
When buying a home with owner financing, the most important thing is to pay a close attention to the terms and conditions outlined in the contract. They will dictate how your financial and legal obligations will be different from those in a conventional home loan arrangement. While the banks follow strict underwriting norms when reviewing a home loan application, owner financing contracts are fully customizable. While it makes owner financing a flexible financing arraignment and enables to buy your dream home without credit check or income verification, it may also give rise to certain complications. You should have a qualified professional review the contract.
Here at Shop Owner Finance, we help credit-challenged individuals and families learn how they can get owner financing with a proven, rubber-stamp system and with terms that are more or less similar to a conventional mortgage.