When you are in the process of purchasing property, it is best to iron out the specifics of the contract. While the fine print may seem overwhelming, it is always advisable to take time to review the terms before signing the dotted line. To better provide transparency to our clients, we created this post that reviews what exactly goes into an owner-financed mortgage contract.
What exactly is on an owner-financed mortgage contract?
The first thing you should look for in an owner-financed contract is the definition of terms: such as “Buyer,” “Owner”, “Seller,” or “Property.” It is important to identify and review the section that defines these terms in order to better understand who will be responsible for what.
As you continue reading the contract, the next few sections will generally explain what the terms of the transaction are. In this case, you should be looking for descriptions that provide details about the property and specific contract provisions. Some of the most important points to pay attention to include:
- Total purchasing price
- Interest rate
- Length of the mortgage
- Amount of down payment required
- Acres or square footage of property
- The amount the property has been appraised at
- Whether any portion of the price will be financed through any third parties like a bank
What to Watch Out For
Any contingencies—or provisions for any unforeseen events in the future—may exist within the text of the contract as well. They are included to ensure that both parties are protected should the need arise.
For instance, should a buyer not pay the mortgage, the contract will typically state that the owner has the right to begin the foreclosure procedures and repossess the property afterward. On the other hand, if the owner were to change loan servicing companies, then the seller would have to notify the buyer within 30 days.
These contingencies differ from seller to seller, so reading your contract thoroughly enables you the ability to ask questions or raise concerns, should you have them, before you sign.
Signing the Contract
Usually at the end of the contract is where you will sign your name and the date. The seller of the property will do the same. All that is left is to have the document notarized in accordance with state law. In fact, some states require that the contract is notarized in order to be legally enforceable.
Check with a licensed attorney who has experience specific to real estate to find out whether or not you need the contract notarized.
Understanding the Law Behind Owner-Financing
Understanding the law behind loans and financing will give you that edge you need to understand what an owner can do and what rights you have as a buyer. One such law is known as Title XIV, also known as Dodd-Frank Wall Street Reform and Consumer Protection Act.
The act aims to put a stop to predatory lending practices by protecting buyers from acquiring loans that they cannot possibly pay back. In order to do this, the owner/seller of the property is obligated to investigate eight specific factors related to the buyer’s finances and finance history:
- Current income or assets
- Current employment status
- Credit history
- Monthly mortgage payment
- Other mortgage payments from the same purchase
- Monthly payments for other mortgage-related payments such as property taxes
- Any of the buyer’s other debts
- The buyer’s debt-to-income ratio
On top of all that, the owner must take into consideration whatever other life expenses the buyer has to ensure that the buyer has the ability to repay (ATR) after all bills have been paid.
Aside from the Dodd-Frank act, Texas has another law called the T.S.A.F.E. Act that imposes a licensing requirement on original owners of owner-financed property; an owner must have a Residential Mortgage Loan Originator (RMLO) license to sell a non-homestead property.
The RMLO provides a form of Good Faith Estimate, Truth in Lending disclosures, gives state-specific disclosures, and ensures all “cooling off periods” are observed in the loan process.
Santa Cruz Properties: Start the new year on the right foot by finding the owner-financed property of your dreams!
At Santa Cruz Properties, our decades of experience have taught us that in order to keep our clients happy, we need to be straightforward and set expectations early to provide excellent service.
In the end, these contracts are not cookie cutter, copied and pasted documents. Each is tailored to the specifics of the deal you have made with us.