Financing (Part 4) Owner Firsts, Owner Seconds, and Balloon Notes

Structuring Owner Finanancing With Owner First Mortgages and Owner Held Second Mortgages

You start to get real resourceful with owner financing when you consider the ways you can address first mortgages and/or second mortgages in creative fashion. For example, an owner might not be willing to hold 100% owner financing, but want 30% down and be willing to carry the rest as owner financing. You might seek out the 30% you need with a bank loan or a line of credit.

In reverse, perhaps you can get a conventional mortgage for 70% of the purchase price, but don’t have the 30% down payment. You might be able to work out owner financing with the seller for that 30%, in effect making it a no money down transaction. Many banks don't like to do this right now, but that's not universal, and I predict that once the credit crunch is over, it will be a technique back is common use.

Balloon Loans

Generally, with owner financing the seller doesn’t want to drag out the payments for 20 or 30 years. In many cases, they are willing to take the monthly payments but want to be cashed out sooner, and being sensitive to their needs will help you structure financing that works for both of you (win-win). You’ll do this through the use of a “balloon” loan which stipulates that the balance is due and payable at a certain point before the loan is actually paid off.

Let’s say our seller above is willing to do owner financing. But, she doesn’t want to carry the loan any more than 7 years. So, there would be a balloon clause in the seller financing that states the remaining balance is due to her at the seven year mark. We can still structure the payments on a 20 or 30 year schedule to keep the payments low, but at year 7 we have to pay it off.

The tougher the credit market, the more valuable owner financing becomes - learn these techniques because they can make the difference between being able to finance and property and not getting it at all.