Do you have a house to sell?
Perhaps you’re thinking about selling, and maybe you’re thinking about seller financing. But if you have a mortgage on your house, you might be wondering, “Can I do owner financing in Florida if i have a mortgage on the property?” We get this question a lot so we decided to answer that question here… Keep reading in this blog post and we’ll answer that question and give you some strategies to move forward…
You have options
Homeowners who are thinking about selling have several options. They can list their home through an agent, or they can list it themselves, or they can sell directly to a buyer. And, many homeowners are discovering a simple strategy called “owner financing” or “seller financing” that allows them to sell their home to a buyer and collect regular payments that pay off the house:
- The buyer pays a down payment
- The buyer pays regular monthly payments
- When the agreed-upon price is paid, the title reverts to the buyer.
That is the simple way to see it. There are many more legal complications that, if not done right could lead to a default or a lawsuit. Always consult legal counsel and a title company before proceeding.
Homeowners love it because it’s a great way to sell and a great way to find even more buyers – including those who might not be able to get traditional bank financing. Home buyers love it because it means more choices for them and they don’t have to necessarily impact their credit score to get a house.
If you own your house outright, you can do a seller financing agreement. But what happens if you have a mortgage? Maybe you’re wondering,
“Can I do owner financing in Florida if I have a mortgage on the property?”
The short answer is: it’s complicated.
Seller financing with a mortgage
In some states, you can create something called a “wraparound mortgage” in which you extend a mortgage to a buyer (usually at a higher rate of interest) while still paying your own mortgage to the bank. However, this is not legal in all states and all situations, and there are additional clauses that you should be aware of.
“Wrap-around mortgage: Also known as an all-inclusive trust deed (AITD) or all-inclusive mortgage, it’s a type of financing arrangement in which the seller agrees to accept a mortgage from the buyer that “wraps around” an existing mortgage still owed on the property. The buyer makes payments to the seller, who in turn continues to make payments on the original mortgage. The wrap-around mortgage “wraps around” the seller’s mortgage.”
Due-on-sale clause: Most mortgages have a due-on-sale clause, which means that if the property is sold, the full mortgage amount becomes due immediately. When a seller agrees to a wrap-around mortgage, they are taking the risk that the lender won’t call the loan due when the property is sold to a new buyer using this financing method.
Can I Do Owner Financing if I Have a Mortgage on the Property? – You have choices
If you’re unable to sell with seller financing because of a mortgage, you have other options…
An alternative that might work for you is called rent-to-own, which has some similarities (such as ongoing payment and you own the house) and some differences (there might not be a down-payment and the buyer needs to qualify for a mortgage from a bank at the end of the pre-established rental term).
Rentals have gotten a bad name because of a few bad apples there are some good owners that have to take the slack for the bad ones.
Here is a list of guidelines if you don’t call us, but instead want to sell on a rent to own model.
Agreement: The buyer (tenant) and seller (landlord) enter into a contract outlining the terms of the agreement. This includes the monthly rent amount, the portion of the rent that may go towards the purchase price, the purchase price of the property at the end of the lease, and the duration of the agreement.
Option Fee: The buyer pays the seller an upfront, non-refundable fee called the option fee. This fee gives the buyer the right to purchase the property at a later date for a predetermined price.
Rent Payments: The buyer pays rent to the seller, typically at a higher rate than the market rent. A portion of the rent may be credited towards the purchase price if the buyer decides to buy the property.
Maintenance and Repairs: In most cases, the buyer is responsible for maintenance and repairs during the lease period, as they are considered tenants. However, the specifics can vary, so it’s important to clarify these responsibilities in the contract.
Purchase Decision: At the end of the lease term, the buyer has the option to purchase the property at the agreed-upon price. If the buyer decides not to purchase the property, the option fee and any rent credits are usually forfeited to the seller.
Benefits for Buyers: Rent-to-own can be beneficial for buyers who may not qualify for a traditional mortgage due to poor credit or insufficient down payment. It allows them to lock in a purchase price and build up equity while improving their credit and saving for a down payment.
Benefits for Sellers: Sellers can benefit from rent-to-own agreements by securing a tenant who is likely to take better care of the property since they have a vested interest in its future purchase.
Additionally, sellers may be able to fetch a higher rent and sell the property at a potentially higher price than if they were to sell it outright.
Risks: Rent-to-own agreements can be complex and may carry risks for both parties. For buyers, if they fail to exercise their option to purchase the property, they may lose the option fee and any rent credits. For sellers, if the buyer defaults on the agreement, the seller may need to go through the eviction process to regain possession of the property.
If you are thinking about accepting owner financing but you still have a mortgage on your property, here’s another option for you: Get in touch with us and talk to us about your property. As experts in buying and selling real estate, we are aware of a number of options that you might not know about. We can walk you through those options and help you out ourselves or we can connect you with someone who can help you.