What to charge for owner financed mortgage?
Question: My wife and I are selling a house. We’ve been approached by some who wants us to finance their mortgage due to bad credit. They have money for a sizeable down payment. They house is paid off, and we don’t need to money right now, so we can afford to carry the loan.
The question is what interest rate would be fair? If they could qualify for a loan, they could get about 6% APR right now. I certainly need to make more than this for it to be worthwhile, but I don’t want to be unreasonable or gouge anyone.
Is there a typial rate that is used to finance people with bad credit? 1% over the typical rate? 2%?
I’d be happy carrying a mortgage with 8%. Most people don’t keep a house more than 5-6 years, this would be a good ROI for me on a 30 year loan.
Thanks for any help,
Answer: 10-12%, a three year balloon note. That gives the buyers three years to clean up thier credit to refi, the house time to increase in value, and you know there is an end in sight before you drop dead. All the messages so far assume that the buyer has poor credit and that the interest rate should be in the high risk range. But this kind of financing can be a good idea even when the buyer has less than perfect, but not awful credit and the seller does not expect interest way above the going rate. A good plan might be a rate one or two points above the bank rate and one or two points below the high risk rate. It could be win-win for both parties. Thanks to all for the replies.
Don, that’s the space I’m in right now. I have not yet run a credit check on them, but they have told me they have bad credit. As John said, if they could get a 6% loan, they would do so.
I’ll probably go 2.5-3% points above conventional if they have some credit issues, and only approach 10% if their credit is truly terrible. I’m glad to give these people an option, but also need to make a reasonable return on my investment, and definitely need to cover my ass.
Good advice on the lawyer, on making the rate higher but then discounting for on time payments, and on the 3-5 year balloon.
I’ll ask my attorney this question, but do any of you know if there’s some way that other creditors could be in line ahead of me? In other words, if they default on the loan after 18 months, is it possible that some other creditor gets the house before me? Back taxes, maybe?
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