Owner Financing work in Utah – You live in Utah, so you have probably heard about owner financing. It’s a term popular with senior citizens or retirees looking to generate some extra income with their properties. The idea is relatively straightforward. For the sake of simplicity, let’s assume you own home clear & free in Utah. You don’t owe any mortgage, and you’re the sole owner of the property. But at this stage, you want to downsize and would like to sell your current home.
Instead of just selling the property for one lump-sum amount, you consider turning the equity into more cash, like working as a lender where you’ll lend the equity of your home. The borrower will pay back the money in installments with an interest rate. Sounds good?
So, let’s say you sell a house worth $100k at an interest rate of 2.8%. The amount has to be repaid in a period of 60 months. So, in the next five years, you’ll be getting monthly income, and you’ll get your complete balance back in 5 years or so. The hierarchy sounds good on paper. Let’s see what the details are.
Balloon Payment: Seller financing projects are not lengthy in nature. You’re not a traditional bank, and obviously, you don’t want to complete the payments in the next 30 years. For the best interest of both parties, make it a short-term loan typically ranging from 1 to 5 years duration.
Credit Score Improvement: Bad things happen to good people. Sometimes a person has a good income, a job history, but they can’t qualify for a mortgage. Maybe they are going through a divorce. Perhaps they are self-employed, and the bank doesn’t want to take the risk. In either situation, the bank refuses to lend them money, and now they can’t buy a house in Utah. Such buyers turn to people like you. You can help them with financing. The money is lent with the assumption that the buyer’s situation will improve in the next five years, and they can arrange financing to pay your money back. You (and the prospective buyer) must discuss the scenario with an experienced attorney to understand market situations and likely pitfalls.
You’re Not the Landlord: Selling is different from renting. You are not responsible for repairs, renovations, or other hassles associated with being a landlord. You sell your house, and you’re done with those repairs and phone calls. However, your job is to collect the payment on time.
Promissory Note: As it happens with mortgage approval, you will sign a promissory note. It says that if the buyer fails to pay your money back, you can foreclose the property. In your contract, you can impose a penalty to cover up for the loss. That promissory note makes you the lien holder. You can also choose to sell this note to a real estate investor in Utah.
Credit & History Check: When you use “seller financing,” you’re mostly working with a buyer who doesn’t have an established credit score. That’s why they couldn’t qualify for a traditional mortgage. However, if they make continuous payments, they can build up the score gradually. But that’s all the positive news.
For some genuine or other reason, the purchaser can get behind on payments. They can abandon or damage the property. What are your options then? Are you going to foreclose the house? That’s a long and complicated process, and even traditional banks hate foreclosures. You have your rights, and you can exercise them, but you have to pay for the entire process and the repairs. (Don’t expect the home to be in great condition.)
In real estate, they say you make money when you buy the property. The same is true in this situation. You have to be careful from the beginning. You’re handing over your property to a stranger in exchange for a promissory note. Check their employment history. Get a credit report. Review criminal records and talk to your attorney before finalizing the deal. For any help or feedback, please contact us here.