Owner Financing: How does it work?
Owner financing is a method to purchase real estate when a traditional mortgage may not be the best option for you or you do not meet certain requirements. When using a traditional mortgage, you borrow the funds from a bank to pay for the property and make monthly payments to the bank to pay off the loan. By owner financing with The Greenline Initiative you repay us directly in installments, a combination of principal and interest, until you’ve paid off the purchase price of the property. We manage the promissory notes, mortgages, and trust deeds, while protecting everyone involved.
An Example of Owner Financing
Let’s say you see a home in our inventory and would like to purchase from The Greenline Initiative for $100,000. You could go to the bank and borrow the funds, along with the associated fees and additional costs. Though perhaps your credit isn’t the best or your self-employment salary is difficult to verify. Whatever the reason, you can make payments directly to The Greenline Initiative with the installments including the principal and 8% interest* over a typical 30-year term or shorter.
Amount Financed: $100,000
Interest Rate: 8%
Number of Payments: 360 (30 Years of monthly payments)
Monthly Payment (Principal and Interest): $733.76
Typical Owner Financing Terms
Depending on the property and the buyer we offer different terms for owner financing... straight amortization, and loans with built in balloon payments are the most common.
Like most traditional sellers, The Greenline Initiative requires a down payment, though a traditional seller will usually require between 5% to 25% of the loan amount. We require a down payment of only $3,000, which can be reduced through use of the Greenline referral program.
Traditional mortgages have a 30-year amortization, which is what a borrower would expect when seeking real estate financing. The Greenline Initiative offers a straight amortization of 30 years or they can be wrapped up with a balloon payment at the 5 or 15 year mark.
With a balloon payment, the full amount of the principal is not repaid during the loan term resulting in a lump sum payment due at the end of the loan. For example, as an owner if you do not want commit to a loan repayment for 30 years, The Greenline Initiative offers a shorter repayment term that culminates in a balloon payment at the end of the term. Which would look like a 15-year mortgage based on a 30-year amortization. This would result in lower monthly payments for 15 years but would require a sizable balloon payment at the end of year 15. There is risk involved with utilizing this tool as a method to purchasing a home on both sides of the transaction.
To create an agreement for owner financing with The Greenline Initiative, we will create two forms of paperwork. One is called a promissory note, which spells out the loan terms and expectations for repayment. The other will be either a mortgage document or something called a deed of trust, which provides security for the loan.
Promissory notes are not difficult to understand. They are your promise to repay the debt and include the following information about the agreement:
- Amount of debt
- Term of repayment
- Interest rate
- The repayment schedule
- Frequency of payments like monthly or quarterly
- Payment amount and whether it is principal and interest or takes another form
- Whether a balloon payment is involved and what those specifics are
Promissory notes will detail the penalties for late payments, any prepayment penalties, and whether the loan balance may be due in full if you sell the property (called a due-on-sale clause).
Mortgages and Deeds of Trust
These two documents serve the same function; whether one is used over the other is mainly a function of where you are buying and what the customary form is in that area. Both mortgage documents and deeds of trust provide security for the seller. In effect, they place a lien on the property and provide for remedies if you default on payments. The method of foreclosure is specified and varies depending on whether a mortgage or deed of trust is used should the owner need to repossess the property.