Financial Advice on Buying Your First Home: Bank Mortgage vs Owner Financing

There are so many considerations when purchasing a first home that it makes the entire process a bit overwhelming. A house is typically the largest purchase that someone makes. It is vital not to make a mistake that may be regretted the rest of your life. Even if a person has the credit to go through a bank for the mortgage, owner financing might be a tempting offer. But should you do it?

Loan Security

A bank mortgage provides a level of security that doesn't exist with owner financing. While a bank could sell your mortgage to another bank, or the bank itself could be purchased by another bank, the odds are slim that these issues could affect your mortgage. A bank mortgage provides the security of dealing with an institution whereas owner financing is strictly with an individual. What if the owner died? What if the person who inherited the note didn't want monthly payments?

Credit Bureaus

A good credit rating is built through timely payments for credit purchases. A bank mortgage would help to raise a credit rating. But with owner financing, generally it isn't reported to the credit bureaus. There will be no record on your credit report of the mortgage, which won't benefit your credit rating even though all the payments were made on time.

Refinancing

Bank refinancing is for people who want a lower interest rate and have a history of making timely payments. Generally no money is involved in the refinancing process. A credit report is pulled and then a decision is made if to approve the request.

If a home is financed through the owner and then a bank is approached about refinancing, it isn't really refinancing. It's like getting a mortgage for the first time. And keep in mind that banks do not provide mortgages on single wide trailers and that double wide manufactured homes must be on a permanent foundation. The bank will also require a current inspection and appraisal.

A bank isn't going to finance the home beyond its appraised value. If the situation was the home was overpriced with a high interest rate and a small down payment then almost the entire payments would have went toward interest. This means to finance through a bank, a large down payment will be required similar to what would have been paid to begin with if a bank had been used. The owner financing contract may not allow for early payoff, which is certainly an option to have stipulated in the agreement.

Owner financing is usually cheaper in regards to closing costs, but there are so many variables involved that it'd be best to discuss the possible negative outcomes of owner financing with a lawyer. At a minimum a lawyer should look over the purchase contract before the signing.