O’Connell Team's Blog
A vast majority of homebuying transactions rely on the buyer qualifying for a mortgage through a bank. After all, most people don't have enough cash lying around to buy a home outright. Nowadays, you have more options with different types of lenders and alternative financing companies where you can seek pre-approval online. But sometimes even these options don't work out, as pre-approval doesn't mean you're actually going to get the underwriter at the lender to approve you.
This could make you consider other alternative options like seller-financed mortgages.
What is a Seller-Financed Mortgage and How Does It Work?
As the name implies, you are financing your purchase with the person or company selling the home instead of taking out a mortgage with a lender. It's a private transaction where you, the buyer, make an arrangement with the seller to buy the property.
The seller draws up a promissory note that details the terms of the mortgage: interest rate, payment schedule, and the consequences if you default on the mortgage. In most cases, the seller then finances the sale for a short term, usually five years, with a balloon payment at the end of the period. However, the promissory note can be sold at any time to another financing company: sellers don't necessarily need to wait for the buyer to refinance with a more traditional lender.
Why Would I Consider a Seller-Financed Mortgage?
There are situations that make it difficult to work with a traditional lender, such as:
- Self-employment / entrepreneurship
- Foreign employment
- Frequent job changes, or you haven't held the same job long enough
- Poor or no credit
- Tax-related issues
- Debt-income ratio is too high
Sometimes, these situations can be incredibly frustrating when you know you'd be able to afford the mortgage payment or it's even far less than market rent where you want to buy! Alternative lenders may have options but sometimes even they don't want to lend to the self-employed or borrowers with high student loan or credit card debt.
This makes seller financing a more viable option when you can demonstrate your ability to make payments but are having trouble with the traditional channels.
What are the Key Pros and Cons of Seller-Financed Mortgages?
The down payment, interest rate, and other terms are more flexible although they may not necessarily be better than what you would get with a bank. There are also no points, PMI, or origination fees which can save money upfront and over the life of the loan.
Closing is also much faster, easier, and cheaper because there's no loan officer or underwriter involved.
However, the seller may not always confirm they're able to finance the sale. If the seller has a mortgage, most of them have a due on sale clause that forbids them from selling the home without paying off their mortgage balance first. If the seller still does this without paying off the mortgage first, your new home could get foreclosed on.
The homebuying process can be a difficult undertaking, but we're here to help you find the best options so you can buy your dream home as quickly as possible. Reach out today to learn more!
When financing a home purchase, one of the most basic decisions to make is where to get your mortgage from. The basic options are whether you should go to a mortgage lender or not. Financing with a mortgage lender has both pros and cons.
Pro: Many Loan Options
If you go to a mortgage lender, you’ll find that they offer a great amount of choices. These are essentially brokers for various underwriting companies, and they offer many loan options. You’ll also have a wide variety of mortgage setups to choose from. Whether you want a 15-, 30- or 40-year fixed or some sort of variable loan, you can likely find it through a lender.
Pro: Might Be Able to Negotiate
The choices that mortgage lenders provide sometimes make it possible to negotiate with potential lenders. If you can pit multiple lenders against each other, you might be able to get a lower interest rate or complimentary points on your loan. A lender might even try to negotiate on your behalf.
Pro: Knowledgeable Guidance
At a mortgage lender, you’ll work with a loan officer whose sole job is to help homeowners find mortgages. They’ll be knowledgeable and able to provide you with informed guidance throughout the loan application and selection process.
Con: Might Not Be Local
Should you shop loans with a mortgage lender, it might not be someone local to your area who’s providing assistance. Often mortgage lenders service people across a state and even maybe in multiple states. As a result, there’s a good chance you won’t ever meet them in person.
Con: Might Sell Your Loan
Ultimately, mortgage lenders are in the business of underwriting and managing mortgages -- and that’s not necessarily the customer service business. If a lender deems it financially prudent to, they’ll sell your loan to another lender. Not only will you not deal with the same person or office, but you might not even deal with the same company down the road. Since mortgages last many years, there’s a chance yours could be sold multiple times.
Finding a Mortgage is a Personal Choice
A mortgage lender may be a good option if you’re looking for a great deal on a home loan, but they don’t offer a personal touch. If you want someone in your area and prioritize personal service, a credit union or other more local institution might be a better alternative for you. The decision to go through a mortgage lender or another place ultimately depends on what type of experience you want.
A wise man once said to hope for the best, but plan for the worst. When you’re contemplating buying a house, even before beginning the actual application itself, it’s helpful to consider what could possibly lead to its rejection. This is especially important if you’ll be applying for your home loan at a traditional bank. These are particularly finicky with whom they give house loans after the 2008 financial crisis. So, here are a few pitfalls you need to sidestep when filling in your application forms.
Sketchy job history
In order to be sure you’ll be able to pay them their money back, lenders like to get a picture of a steady flow of income in the near future from applicants. You won’t help this cause if your job history reads like a game of musical chairs. Or if there are gaps in your recent past where you had no source of income. Mortgage officers like to see some sort of stability in the income streams of applicants. If they don’t get that impression, your pre-approval might not see the light of day.
In that vein, be sure to document your income streams and assets well in anticipation of the day you will be making that application. This preparation could be the difference between approval and rejection.
Low credit score
A low credit score can be as a result of unpaid debt or debts that you eventually paid up but didn’t update on your FICO records. Either way, if your score is lower than 620, lenders will consider approving your mortgage a risky investment. A low credit score should not, however, spell death to your dreams of owning a home. Get your credit score from one of the many available online sources and see how you can improve it. After a couple of months, you will find yourself eligible for that mortgage.
Outstanding tax liens
An unpaid tax lien or judgment from the past that you may have forgotten about may negatively affect your application. It may not be a problem in the initial stages, but at the point when your lender does a title search for the property, unpaid federal or state tax liens will surface. A clear title policy cannot be issued with outstanding tax liens or judgments.
Find out your FICO score for free online and talk to your lender to determine the best course of action for you.
Are you having money issues? Well, you are not alone. Financial problem is something that affects everyone from time to time. When money is tight, and your mortgage is due, you might have heard this advice many times — " Take up a mortgage payment holiday" But before you do that, get this: taking a break from your mortgage repayment is not always the best idea. In this post, you will uncover all you need to know about mortgage payment holidays.
What is a Mortgage Payment Holiday?
A mortgage payment holiday is an agreement a person may reach with his/her lender permitting them to reduce or halt their monthly mortgage repayments for a specific period. The duration of this break can range from one month, six months or even a year. However, the length of the breaks depends on a person's financial situations and the terms laid out by the lender.
Who is eligible for a Mortgage Payment Holiday?
Most of the times, Mortgage payment holidays are offered by lenders when:
- If a person has accumulated a generous amount of credit via mortgage over-payments.
- If unforeseen expenses prevent a person from making repayments.
- If there is a change in the financial circumstance of a person.
When nursing the thought of taking a payment holiday, always remember you will need a decent history of your repayments, most times with no back payment due during the previous year of your mortgage.
The Good Side of a Mortgage Payment Holiday
It temporarily takes some pressure off your monthly expenditure until you get a new source of income.It is the best way to find your feet again instead of choosing to go into mortgage arrears.
The Bad Side of a Mortgage Payment Holiday
Even though you are not making mortgage payments, your remaining mortgage balance is still piling up interest.After the holiday payments, your mortgage repayments will be higher than they were before you took the payment holiday.Since it will affect your credit file, you might find it challenging to get credit.
A break from your payment might be a prudent choice if the only option is going into arrears. But don't forget the "bad side." If something confuses you about how to you will make a payment, then you will need to speak to your lender.
Going through the process of applying for a mortgage only for your application to get denied can be a frustrating and confusing time. If you’re hoping to buy your own home in the near future, it’s vital to secure financing or you risk missing out on a home that you may have been depending on getting.
In today’s post, we’re going to talk about what happens when your mortgage application is denied and what you can do to fix the problem as quickly as possible.
Determine the Cause of Denial
If your application is denied, priority number one needs to be to understand what happened. Since lenders are required to provide denied applicants with a letter explaining why they were denied, this just means reading the letter and making sure you understand all of the reasons listed.
There are a few common reasons that an application may be denied. Some of them are simple fixes, while others might require time and effort on your part that may delay your house hunt for a while.
One issue that many mortgage applicants have to handle is when their employer won’t provide proof of income to a mortgage lender. Since income verification is vital to the mortgage application process, it’s important to make sure you can provide all of your income details from the last 2 years to the lender.
Sometimes there are issues with contacting employers, such as when your former place of employment goes out of business. Or, you may be a freelance or contract worker with atypical forms of income verification. Regardless, make sure you are clear with your loan officer regarding your employment history.
Other common causes for denial of an application include problems with your down payment (such as not meeting the required down payment amount) and credit history issues, such as having a lower score than you thought.
Credit score lower than expected
It’s not uncommon for a lender to run a credit check and come up with a score that is lower than you anticipated. Since scores change on a monthly basis, and since there are differences between the scores provided by the three major credit bureaus, you might find that your lender found a score slightly lower than what thought.
If the score is drastically different, however, this could be a sign of two things. First, make sure that you haven’t recently made multiple credit inquiries (such as applying to several lenders who perform credit checks) or by opening new credit cards or loans. These inquiries temporarily lower your credit score.
If you haven’t recently made any inquiries (other than applying for a mortgage with your lender of choice), then it’s a good idea to get a detailed credit report and scrutinize it for errors. Inaccuracies on your credit report can be disputed and resolved and can give your score the boost you need to be competitive on your mortgage application.
Choosing a different lender
While most lenders use similar criteria in determining your borrowing eligibility, there are some differences between lenders.
For example, some lenders might take on more risk by lending to someone with a lower credit score. However, they will also likely require a higher interest rate in exchange for the added risk they’ve acquired.
Now that you know your options for what to do when an application is denied, you’re well-equipped to start tackling the issue and getting back on track to becoming a homeowner.