The new mortgage reality - Owner Financing -

There is no shortage of home buyers, just a shortage of financing options. The current economic situation has produced conditions that have lowered the FICO credit scores to below 640 for 50% of the US adult population. Presently a FICO of 640 is generally the minimum level for consideration for a bank loan. Add in the buyers who are self employed, unemployed, have higher debt to income ratios, or recently divorced, and this percentage soars. No wonder homes can't sell. Many of these now credit disadvantaged people were good credit risk not long ago. Many have new jobs with good incomes that can afford a home. However Banks are not lending. A new program started last year by National Real Estate Services.com inc. of Greenville SC, a fully licensed SC Escrow Management & Realty company, has helped many buyers purchase (& sellers sell) a home rather than rent one. The program called "Beat The Bank" uses a seller's first mortgage to owner finance a sale. NRES helps close the sale thru an attorney, sets up the payment plan, collects and reports the payments to a credit bureau (builts the buyers credit) each month, pays any first mortgage payments, taxes and insurance debts, issues monthly profit checks, prepares yearly 1099's, and enforces the performance of the contract by all parties. Once the buyer is able to secure a bank loan (normally 2 years or less) the seller gets his full equity. Terms are negotiable between the parties but some down payment (app. 4% min.) is recommended. NRES charges 1% origination fee to set up the payment plan and $75 a month to manage the payments and report to the credit bureau. visit [link removed by moderator]
  • August 06 2010 - Greenville
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Answers (9)

Profile picture for SoCal Engr
"There is no shortage of home buyers, just a shortage of financing options. The current economic situation has produced conditions that have lowered the FICO credit scores to below 640 for 50% of the US adult population. Presently a FICO of 640 is generally the minimum level for consideration for a bank loan. Add in the buyers who are self employed, unemployed, have higher debt to income ratios, or recently divorced, and this percentage soars. No wonder homes can't sell. Many of these now credit disadvantaged people were good credit risk not long ago. Many have new jobs with good incomes that can afford a home. However Banks are not lending."

The "credit disadvantaged people" were never "good credit risks". The guidelines had simply been lowered to enable them access to credit. The changes now in place are in response to the number of these "good credit risks" that went, or are going, down in flames and unable/unwilling to meet their mortgage commitments.

There's never been a shortage of people who want to buy homes. For a while, there was an over-abundance of people able to buy - driven by an overly lax access to credit. Now, that spigot is being turned down and the pool of unqualified buyers is being thinned from the herd.

As for the self-employed, I feel for them. However, it was the RE industry which abused the no-doc/stated-income loans so badly that they are now the unicorn of the mortgage world, so please look in the mirror when you bemoan the fate of the self-employed.

As for "no wonder homes can't sell", it's because the current supply of homes for sale/purchase was based on an artificially inflated pool of buyers. Thin the herd of buyers and guess what...less houses will sell. In my opinion, this is a good thing. Painful? Yes, but beneficial in the long run.
  • August 06 2010
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Obviously you have a California view of the real estate world. Things are much different in other parts of the US.
  • August 06 2010
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Profile picture for SoCal Engr
How is my view California-centric? It was a generalized response to a scenario you put on the table. You are the one who said the real issue is lack of access to credit for people who previously were considered good credit risks. I simply said that they were never good credit risks, just that lending standards had been lowered to bring them into the buyer pool - and now that is no longer the norm.

Are you saying that credit standards were not lowered outside of California? That housing prices outside of California did not experience some level of artificial inflation due to demand from the resultant buyer pool? Or that forclosures and jingle-keys due to borrowers being over their head on underwater mortgages is exclusively a California problem?

The buyer herd needs to be culled, and this is going to have an effect on home sales. This will be painful for sellers, builders, and RE agents. Hopefully, owners will be able to ride this out, but many will not. Same for builders and REAs. But, the correction needs to occur, and it will only be more painful the longer it is delayed.
  • August 06 2010
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Mike,

Your view is how do I sell more properties!

A Seller would be foolish to offer seller financing to buyers that banks won't provide financing for.  Clearly the risk is too great to the bank why would that be a good thing for the seller.
  • August 06 2010
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Profile picture for Gannet
I'm as far from an expert as it gets, but I can't see that this is so different from lease with option to buy.  So I don't see where it's "bad".  The original mortgage bank gets an income stream, which probably beats a foreclosure and maybe even a short sale.  If the buyer pays for 2 years he's probably a good risk going forward, no matter what FICO says.  If the buyer defaults the first mortgage bank is back where they were.

As to "these people were never good credit risks", that's just silly.  Some were, some weren't.  Banks don't have all that great a track record of deciding who is and isn't a good credit risk.  So just because they say someone isn't a good risk doesn't make it so.
  • August 06 2010
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Profile picture for sunnyview
I have actually seen problems for both the buyer and seller side. Often the buyers pay too much over rent every month and then get nothing back if they cannot complete the sale. Often sellers have to evict their buyers if the buyers are unable to qualify after the defined lease period. The main problem that I see with owner financing is that if the buyer defaults the owner may get a damaged property back and lose out on a sale to another buyer. 

Often the lease to own or owner finance contracts are not even good enough to hold up for either side in court if it goes south. I guess I would feel differently about these deals if I had seen them work or the contracts were written better, but one side always seems to get burned. The only question is which side will it be.
  • August 06 2010
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Profile picture for nelson8989
What about the "due on sale" clause?  No one has mentioned that owner financing activates that.  Yes, who tells the bank?  But what owner wants to run the risk?  Not me!
  • December 31 2010
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Mike, what about Nelson's question? Do you get the blessing of the existing lien(s) holder to do a wrap around? If the borrower puts down 4%, what happens to that money if they can not qualify for a mortgage in 2 years, lose it? What happens if they do qualify in 2 years but the property lost 15% value in those 2 years?
  • December 31 2010
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Profile picture for blank screen EXILED
Mike -

Since you are stating that your credit is so poor that you absolutely cannot qualify to get a loan to buy a house, tell you what, buy my house at $3.6 Million with 50% down, and I will seller finance it to you at 12% annual interest, and will foreclose on you and take the property back as soon as you are 90 days late on your payments.

Sounds like a really good "deal" doesn't it!  Never mind that my house will never appraise for that; I'm not accepting any appraisal contingencies or inspection contingencies in any offer!
  • December 31 2010
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