Learn The Basics Of Writing A Perfect Owner Financing Contract

Terms are written in a contract that becomes legally binding once the parties referenced in the document agree to the terms and sign their names. A contract shouldn’t be taken lightly when it’s drafted.

This holds true for owner financing contracts as well. It’s definitely in your best interest to learn about how to draft a legally sound owner financing contract.

1- What is Owner Financing
2- How Does it Work
3- How To Write An Owner Financing Contract

However, before we discuss how to write an owner financing contract, it’s a good idea to know what it is.

What is Owner Financing?

Buying a home is a big investment.  In order to make payments manageable while juggling other living expenses, people often get a home loan and pay back the loan, or mortgage, in installments. One alternative to getting a mortgage is owner financing. In an owner financing scenario, the seller acts as a lender and finances the purchase of the home for the buyer.

How Does it Work?

If this is your first time hearing the term, you may already be confused about how it works exactly.  Well, it works differently than in a traditional mortgage arrangement where the lender provides the funds to the seller upfront and gets reimbursed through monthly installments with interest. In owner financing, the seller does not provide the buyer with the total funds needed to pay for the property; instead, the seller only provides the money necessary to close the deal.

Once the deal is done, the buyer is supposed to pay the entire sales amount to the seller. It is worth knowing that the seller also charges interest, and in most cases, it’s at a higher rate than a traditional mortgage would assess. The owner usually does not transfer the title until they’ve received the full payment.

To give it legal security, an agreement is signed between owner and buyer which includes all the terms and conditions of the settlement such as the interest rate, payment schedule, and consequences for non or late payments.

How To Write An Owner Financing Contract

When you take out a traditional mortgage, it involves extensive paperwork and rounds of discussion to reach the final agreement. The discussions often revolve around the consequences of being in default for the major portion of the loan amount.

Since you agreed to finance the sale, you have to act as a lender. You need to add similar clauses in the contract to cover yourself and your stakes in the transaction. If you neglect to include provisions in the agreement on the effective terms. You won’t have any legal recourse if things don’t go as planned.

To reduce the risk involved with drafting contract language, follow the following suggestions:

1. Draft a Legal Contract

There are different kinds of contracts available, but as a lender, you need to include clauses in the contract that address contingencies and any other agreed-upon terms with the buyer. You’ll need to check local real estate laws to ensure your document is legally sound.

As a lender, you should incorporate the same language in your contract that is used in traditional home-buying contracts. If you have a copy of your previous mortgage contract it would make a good template for the owner finance agreement that you draft as the seller.

You should also consider hiring an agent to ensure you’ve included the basics in your document. Being a layperson, you’re less likely to be familiar with the technical terms and legalese used in the contract. Hiring an agent would help provide a level of assurance that the document addressed everything that it should.

2. Add in the Numbers

Since the owner finance contract is a financial document, it will include financial information such as the total price of the house, how much has been paid, how much is due, and the length of the loan. In addition, you should include details about the interest rate.

3. Consequences in Case of Default

Sometimes things happen that are out of our control. Therefore, it is essential to incorporate consequences in the contract that addresses what will happen if or when the buyer is no longer able to meet their obligations as stated in the agreement.

It is important for a seller to protect his or her assets. In a time of need, people react desperately. You never know if the buyer would go so far as to sell appliances or other essentials for money.  Therefore, until and unless full payment is received, the buyer needs to maintain the condition of the house. So the seller doesn’t have to go broke due to maintenance expenses if things don’t go right.

4. Right to Evict and Foreclose

In a traditional mortgage, lenders keep the right to foreclose on the property if the borrower stops paying installments for an extended period of time. You need to protect yourself that way as well.

However, laws to evict vary by state. Make sure that you include the right foreclosure and eviction clauses that align with your local law.

5. Establish the Payment Schedule

Since the buyer will be paying in installments, it is all the more important to establish the payment schedule. The contract should state how much the buyer is going to pay on a monthly basis and whether a balloon payment is required at the end of the term.

The lender is not obligated to anybody, so the lender can map out a payment schedule with the consent of the buyer.

Since the seller financing is usually short-term (until the buyer gets a traditional mortgage). The contract should mention when the buyer is supposed to submit that big amount.

Final Thoughts

Writing anything of legal significance can be tricky, let alone an owner finance contract. It is less likely that you will be able to manage everything on your own given the host of other issues that must be addressed in the document like title insurance and transfer rights just to name a few.

So, our best advice to you would be to get legal assistance, be it from a real estate agent or attorney. You would be a lot better off that way.