A few years ago, I spoke with a man who made a living with lease to own properties. Basically, the process went like this: he bought a run-down property at a low price and fixed it up. He then advertised it as lease to own, in order to attract families who dreamed of home ownership but couldn’t quite make the cut. Upfront, they paid him an “option fee” that would be credited to the sale price. Each month they paid him him rent + an extra amount towards the purchase price.

Generally, at the end of the term, the people living in the home were unable to purchase it. So, the seller made out way better than a traditional landlord dealing with renters. In addition to rent, he got to keep all the money they gave him in fees towards the purchase price. As a part of pretty much any lease to own deals, these monthly payments are never refunded if the person living in the home does not buy the property by the specified date.

The biggest downfall of lease to own programs is that, unlike straight forward sales, the money you put towards the house may be going to nothing.

In the cases where buyers are satisfied with these deals, they usually do the following:

1. They know exactly why they cannot qualify for a traditional loan and work on fixing that problem as soon as possible (i.e. they pay off the balances on their credit cards in order to increase their FICO score).

2. They work with a landlord who is basically honest and offers them relatively generous terms (i.e. only a small monthly fee to be applied towards the principle, enough time to fix their qualifying problems).

3. They buy the house when time is up. Obviously this is the single most important denominator.

If all three don’t occur, you’re much better off renting. Pay less each month and save the extra money in the bank until you can take out a regular loan.

Alternatively, you could enter into another, more straightforward, type of seller financing that limits your risk of losing the property and your money. Many homeowners are so desperate to sell right now they are willing to offer seller financing with little / no down payment. In some cases, you may be able to just take over their monthly mortgage bills.

Here are a few of the most common types of seller financing:

Assumable Mortgages

Wraparound Mortgages

Seller Carry Back Mortgages

Private Party Mortgages

Seller financing is a creative lending technique that allows the home buyer to take out a mortgage from the home seller instead of, or in addition to, a traditional bank. Some homeowners use seller financing as an incentive to draw in potential buyers. With seller financing, buyers do not have to meet the traditional lending standards set by Fannie Mae and Freddie Mac. Instead, they only need to meet the qualifications set by the home seller. In many cases, the seller is willing to be flexible in regard to credit score, income, down payment, and other issues.

Types of Seller Financing

There are three main types of seller financing: first mortgages, seller carryback mortgages, and wrap-around mortgages.

If the seller owns the property free and clear, he may choose to be the sole lender by offering a first mortgage. In this case, the buyer takes out a single mortgage through the seller. His monthly payments go directly do the seller, without any bank involvement.

More common is the seller carryback mortgage. A buyer takes out a typical mortgage from a bank as well as a smaller mortgage from the seller. Generally, this second mortgage is used to make up for a buyer’s lack of down payment funds. For example: a buyer may borrow 80% of the home’s purchase price from the bank and 20% from the seller. The bank is the primary lender, but the seller holds a lien on the property until the second mortgage is paid off.

A third option is the wraparound mortgage. In this instance, the seller maintains his own debt on the property after the sale. The buyer sends the seller monthly mortgage payments. The seller pays his own mortgage and pockets additional money. For example: The seller owes $50,000 on a home and pays 5% in interest to his bank. He sells the home for $100,000 with a 7% interest rate. Each month the buyer sends a mortgage payment to the seller. The seller then pays his bank the amount owed and keeps the excess. Read more…