When owner financing a home, you will be required to meet a certain monthly payment obligation. This obligation is often that of the underlying mortgage payment of the Seller. In some cases, where the home is owned “free and clear” (meaning that there is no mortgage on the home), you will be not be bound by this obligation. If the home is not owned “free and clear” the Buyer must cover the amount of the outstanding Principal and Interest payment to the lender (P&I) plus the outstanding escrow account (taxes and insurance) payment. For example, if the Sellers P&I payment is $1000.00 and the escrow account payment is $300.00, then the monthly payment obligation will be equal to $1,300.00. When a Buyer purchases using owner financing, the buyer may elect to put a larger down payment on the home then just the minimum amount to cover the costs to sell the home, and then finance the outstanding balance.
Purchase Price of the Home: $200,000.00
Minimum Down Payment to cover the Costs of Selling: $20,000.00
Balance Financed: $180,000.00
Buyer Elects to put additional Down Payment of $30,000.00
Balance Financed: $150,000.00
If the Sellers Payment is $1,300.00 (Principal, Interest, Taxes, and Insurance), irregardless of the amount financed, the Buyers payment must be equal to or grater than that of the Seller.
On a balance of $150,000.00 at a 6% interest the Buyers principal and interest payment (P&I) is $899.33. Adding on the taxes and insurance (Escrow Account) would bring the payment to
$1,199.33. This is not enough to cover the outstanding obligation of the Seller to the Mortgage provider.
A simple adjustment of the Amortization of the Balance Financed (in this case $150,000.00) to a 23 Year Term would make the Principal and Interest Payment (P&I) of the Buyer $1,003.27. Once we add on the Taxes and Insurance (Escrow Account) the payment of the Buyer would come to $1,303.27, thus covering the outstanding obligation to the Mortgage Provider. In addition, by reducing the amortization to the 23 Year Term, the Buyer will be getting a great amount of principal reduction each month when payment is made.
There are restrictions to this however. If the “Call” (the term of the contract between the Buyer and Seller) is 3 years, and by reducing the amortization to the 23 Year Term would have the Buyers balance on the Real Estate Contract being less than that of the Sellers Balance, the amortization of the Real Estate Contract balance must be adjusted as to not have the Sellers payoff to the Mortgage provider be “short” (the seller would owe the Mortgage Provider more than the incoming payoff from the refinance of the balance of the Real Estate Contract).