If you are in the process of obtaining or selling a private mortgage, you might be researching the pros and cons of owner financing. You will find that one of the main risks in private mortgage is unpaid property taxes. I would like to go over why that is, but first let’s take a quick look at the pros and cons of owner financing.
Let’s start with the most obvious reason: If the buyer doesn’t have the best credit history this is the best way to go to obtaining their dream home. The closing process is quicker as it does not require to wait on bank loan officers, or legal department to clear your file like in traditional bank loans, another advantage for the buyer is the closing costs are also lower since you eliminate bank fees and appraisal fees. Okay, so we went over why the buyer would benefit but why would the seller offer financing?
The Seller might be willing to offer seller financing for several reasons; They can minimize carrying costs, get their property sold faster, have a lump sum option by selling to an investor, better rates, and finally to retain title (if buyer defaults seller can keep the house plus any money that was paid including the down payment). This sounds great in a perfect world but let’s not forget there are also risks that are involved with private mortgages.
Some of the risks for the buyer include: higher interest rates, balloon payments, and you still need approval from the seller. Although the seller may be okay with owner financing, it doesn’t mean that the seller is going to want to be your lender. There is also the risk of Due on Sale Clause. Most mortgages have a Due on Sale clause which means they can’t sell the home without paying off the bank mortgage first. If buyer agrees to this type of transaction, there is a possibility the seller can default and the Lender (bank) can foreclose on the property to get their money back. For this type of transaction, the Note Servicing Center recommends to hire an experienced servicing company that can help with this.
Again, the sellers are not always the lenders on these types of deals, however one of the main questions sellers will get is regarding their property taxes. The reason why property taxes are so important is because any unpaid taxes are a superior Lien to the rights of the lender. This means if you are delinquent on taxes your lender (bank) can foreclose on the property even if the buyer has been making payment on time. That is why almost every loan has a provision that you will pay the property taxes when due and failure to do this will be considered a default and foreclosure can occur.
A Servicing Company can help minimize some of the risks that go along with buying and selling private mortgages. By hiring a servicing company like ourselves, you can ensure a profitable investment for the seller. The buyer will eliminate risks from the seller by collecting for impound on property taxes, insurance, and even pay the senior Lien from the buyer’s monthly payment, to assure it is being paid.