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Great question that more people should ask because with the bank having as much difficulty as they are the need and use of this will be used more and more to close new purchases.
The first thing you want to know (after you determine you are interested in moving ahead of course) is to find out what existing liens are on the property, that goes for mortgages,taxes, mechanics liens, hoa liens, a basic title search should tell you this, the owner should disclose it as well, but sometimes, for whatever reason they may not be aware there are any. Also if there are liens it does not automatically kill your deal, it just has to be addressed and there are a number of options, too many to Explain them all here, but just know there are potential solutions for many problems.
The second thing you want to do is an inspection and appraisal: just because there is no bank do not skimp on the appraisal fee here it can be well worth it to know the value you are paying is in line with the resale value. Also, on the inspection, unless you have lived there or the home is new, you can never be sure that there is not some undisclosed issue or issues that could be very costly if not identified and negotiated in the your deal.
You should also find out who the seller is planning to service the loan, on a standard mortgage the bank you pay is the servicing company for the loan, they provide your 1098 at the end of the year for tax purposes, they may or may not also be the investor which in this case is the seller. You loan should have something similar to this put into place. There are companies out there that offer this service, the seller may or may not be aware of this.
Use an escrow/title company (or attorney if you are in an attorney state) to close the deal. It can be done without this, but I strongly recommend you do use them. They will make sure all liens have been address and cleared or transferred(if there is an existing mortgage in place from the seller) and can insure the title for you, which is important because it protects you from any claims on the title prior to the purchase, the same as it would on a standard purchase. As well as make sure it is a legal purchase and title is properly transferred.
Each situation has its own set of circumstances but these are good rules of thumb to follow to help you avoidsome potentially costly mistakes.
Well-structured, seller-financed purchases can be great deals for all parties. Some sellers are much more lenient and informal with credit and income documentation, and may be willing to consider other strong factors as qualification for the purchase. Bank fees are avoided, and some closing costs may be avoided as well. Closing could take days rather than weeks or months.
However, most people only buy and sell a few homes, if that, in their lifetimes. This suggests that the potential for ignorance or criminality (and subsequent potential damage) on both sides is high. While laws requiring title services, escrow agents, and/or attorneys vary from state to state, I would HIGHLY RECOMMEND that you employ the services of a Real Estate Attorney to assist you (and potentially the seller?) in drafting or reviewing all the legal documents, instruments, and disclosures that make up your note, your mortgage, and your deed and in recording your legal ownership at the local registry of deeds.
I would also highly recommend obtaining an independent appraisal from a licensed real estate appraiser (so that you have an objective view of value), a home inspection from a licensed home inspector (to determine the home’s condition) and a complete title examination (the attorney can help here) to be certain that there is no one else that can lay claim to the property you are purchasing.
These are all costs that you would pay as part of a traditional “bank financed” transaction, and they are all in place for a reason – to protect both buyer and seller. Independent, licensed home inspectors, appraisers, and attorneys in your area can be located by asking friends, neighbors, or local mortgage professionals for referrals, or by contacting your state licensing office or local real estate authorities. All are money well spent – do not be tempted to skip them.
Be certain that you understand the exact terms of your financing:
Is the rate fixed? Can the payments change for any reason?
How long will it take to pay off the loan? Is there a lump sum due at the end (often called a “balloon)?
Who will be responsible for sending tax and insurance payments to the authorities? Will you pay these as part of your loan, or send a separate check?
Will your payments be reported to the credit authorities? If not, how will an accurate record of your payments be maintained?
What costs or fees will you have to pay in addition to the principle amount? Are they due at closing, or rolled into the financing?
What happens if your payment is late? Is there a late fee?
What happens if you stop paying? Is there a grace period before the seller can foreclose and regain ownership of the house? Do you have the right to get caught up?
Is there title insurance available?
Are all city, state, and local taxes, water/sewer bills, etc paid and up to date? Could you be responsible for anyone else’s outstanding bill?
Is the home up to code? Has a smoke detector, carbon monoxide detector, and water certification been provided by the local agencies?
A good local attorney – one who specializes in real estate specifically - will be able to assist with all of the above, and the many, many other questions that could/will arise. Good luck!
What do I need to know before buying an owner financed home?