Brief Introduction About Owner Finance Contract
Owner Finance Contract or seller finance contract is an agreement between a prospective home buyer and the seller. Through this arrangement, the homebuyer borrows money from the seller itself. He does not have to take out a mortgage with the commercial lenders. The seller may provide a part of or the entire sale price of the property as a loan after deducting any advance paid by the home buyer.
Under the contract, the buyer and the seller decide the interest rates, payment schedule, and all other details about the loan. The buyer gives the seller a promissory note stating is an agreement with the negotiated terms. The promissory note is then entered into the public accounts to register the deal to protect the parties.
Purpose of Owner Finance Contract
This contract eliminates the interference of a bank or any third-party lending institution for securing the loan by the borrower. It makes the borrower and the lender the only parties to the entire transaction. Since the interest rates are negotiable, it allows the parties to have a more flexible financial transaction. It also reduces the trouble for the borrower of signing multiple documents stating the consequences of default. It is a much more convenient way for both parties to complete the transaction.
Contents of an Owner Finance Contract
A typical owner finance contract form will have the following key terms:
- Names of the parties
- Date of the agreement
- Description of the property being sold- its location and purchase price
- Creation of loan/mortgage
- Collateral
- Interest on loan, if any
- Amount of downpayment
- Payment schedule
- Taxes
- Obligations of the buyer
- Obligations of the seller
- Events of default
- Right to evict and foreclose
- Notice requirements
- Dispute settlement
- Governing law
- Signature of the parties
How to Draft an Owner Finance Contract?
All the provisions of this contract must comply with the Secure and Fair Enforcement for Mortgage Licensing Act, 2010(1), and the Dodd-Frank Act(2), 2011. When drafting the terms, the following points should be considered:
- All the details of the loan must be clearly explained. These include the sale price agreed on by the parties, how much the seller will finance, the amount (including the downpayment) the buyer will pay, and the interest rate.
- The payment schedule should be understood by both parties. This clause should include, apart from the loan amount, interest, taxes, and any other applicable monthly fee.
- Define the obligations of each party in two separate clauses- one dealing with the buyer and the other with the seller. All the obligations must be clarified so that there is no misconception between the parties. For example, spell out if the buyer is responsible for maintaining the property or if the seller is required to pay the homeowner’s association fees.
- State the events that will lead to a violation of the contract. Also, mention the consequences that will follow. This is important to protect the seller against the non-payment of a loan by the buyer.
- The agreement should contain a clause that gives the seller the right to evict and foreclose if the buyer refuses to repay the loan. Eviction and foreclosure regulations are different in each state. Thus, this term must comply with the law of the state where the property is situated.
- The ‘governing law’ clause must mention the state whose courts will have jurisdiction over disputes arising under this agreement.
Negotiation Strategy
Since the contract involves only the buyer and the seller, it is vital for both parties to forge a healthy relationship between them before negotiating the deal.
For the buyer: The buyer should negotiate the price of the property and the interest paid on loan. He should consider the location of the property and the prevalent interest rate in the market. If he feels that the seller is providing better interest rates and greater convenience, then he should go ahead with the contract. To get an idea of what terms the seller can negotiate for, he can refer to a free owner finance contract template.
For the Seller: The seller should be careful about the credit rating of the buyer. His discussions on the one-time lump sum payment and the interest rate should be based on the buyer’s credit ratings. He may take into account the interest rates prevalent in the market or set his own rate. For better understanding, he can look at a sample owner finance contract.
Benefits and Drawbacks of an Owner Finance Contract
Benefits
- It allows the buyer to secure a loan without going to a bank or other financial institution.
- The buyer can secure a loan and buy a property even if he does not have a good credit rating.
- The seller can sell the property while still keeping the title in his name until the entire payment has been made by the buyer.
- It is convenient, cost-effective, and less time-consuming for both parties.
Drawbacks
- Since the parties can freely negotiate the interest rates, they are generally set higher by the seller than the market rates.
- In case of a default, the seller may seek legal remedies which can take up a lot of time and is expensive.
What Happens If It Is Violated?
If any term of the contract is violated, then the parties can proceed, as mentioned in the agreement. It generally carries a dispute resolution clause that states where a claim can be filed and what remedies are available to the affected party. These remedies may include specific performance, injunction, eviction, or termination of the contract.
This contract is an important financial document. It must comply with applicable federal and state laws. While parties can negotiate the terms according to their convenience and refer to an owner finance contract template, the document must be reviewed by a lawyer to ensure that it is legally valid.