how to calculate an amount to be financed

How to Calculate an Amount to Be Financed.

The full price of a major purchase such as a house, boat or car is rarely financed. Most lenders for these types of loans require a down payment of some sort, usually expressed as a percentage. Additionally, mortgage loans list a different figure, "amount financed," which does not include prepaid fees paid to the lender. Knowing how to calculate an amount to be financed will help you make informed consumer decisions.



Part 1 Calculating a Commercial Loan Amount to be Financed.

1. Determine the selling price. For a vehicle, boat, or another type of commercial loan purchase this will be the amount you agree to pay for your new acquisition. It does not include other aspects of the deal such as the trade-in allowance, fees, taxes, and other closing costs.

2. Subtract any net trade-in allowance. For auto or boat purchases, among others, a dealer may offer a trade-in allowance or credit for giving them your old car or boat when you buy a new one. The value of this item, or a credit provided by the dealer, is then subtracted from what you owe on your new purchase. The net trade-in allowance is found by subtracting the amount still owed on your trade from the trade-in allowance offered by the dealership.

If the trade-in is high enough, dealers don't typically require an extra payment, such as a down payment.

Some dealers may allow you to use the trade-in value of your old vehicle to cover the required down payment on a new one (assuming the old one holds enough value).

3. Account for any cash rebates that are applied to the purchase price of the item. Dealers may also offer cash rebates as a way to incentivize purchases. These cash rebates are simply subtracted from the purchase price at closing. They also do not need to be included in the amount to be financed. Rebates may be provided to certain buyers, like students or military veterans, or may be specific to certain vehicles.

4. Settle on a loan amount. The amount left after rebates and trade-ins is the the amount owed. This amount must be either paid in full or borrowed from a lender and paid off in installments over time. From here, you can calculate the down payment if the lender requires one. For example, a lender might require 10 or 20 percent down on your purchase. Your loan amount is then the amount remaining after the down payment is subtracted out.

5. Use the loan amount as your amount financed. "Amount financed" is a term that is specific to home loans. All other loans simply refer to the amount financed as the total amount of the loan provided to the borrower. For these types of loans, simply use the loan amount after the down payment as calculated in this part as your amount financed.



Part 2 Determining the Amount Financed for a Mortgage Loan.

1. Negotiate a price for the asset with the seller. For a home, this will be your accepted offer price. For example, you might talk a homeowner down to selling a property for $100,000.

2. Subtract any deposits. Home purchases may have required a "good faith" deposit. Other purchases may also require a deposit be made while bidding on or reserving the item. This deposit is typically paid upon submission of an offer to purchase. This money is then subtracted from the purchase price, as you have already paid it.

Deposits are either returned (depending upon terms) or converted into the down payment amount and/or closing costs.

For example, if you put in a $3,000 good faith deposit on a $100,000 home, you would subtract this from the $100,000 to get $97,000.

3. Finalize the loan amount. The portion of the original purchase price remaining after these deductions is your loan amount, assuming you are planning on financing the purchase. This amount must be borrowed from a lender and then repaid over a period of time per a loan agreement. The loan amount is the amount borrowed from the lender, not the amount that will eventually be repaid in total, which also includes interest expenses.

4. Deduct the down payment amount. The down payment is paid in full upon closing the sale. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default. Therefore, it is not included in the amount financed.

Many mortgage lenders require 20 percent down on a real estate transaction, although you may be able to secure an FHA-backed mortgage requiring as little as 5 percent down payment. A lower loan balance results in less interest expense and the possible requirement of mortgage insurance.

A lower downpayment is expected on government- guaranteed loans such as FHA or VA because the lender has recourse to the Federal government in the event of default.

For example, if you paid a 20 percent down payment on the $100,000 house purchase, which would be $20,000, you would subtract this from your total.

Your good faith deposit may be applied towards your down payment. This means that the loan amount would still be the purchase price minus the down payment, which is $80,000 in this case.

5. Understand how amount financed differs from the loan amount. "Amount financed" is a term set by the 1968 Truth in Lending Act to describe how much credit is provided to a borrower when they take out a home loan. It is calculated by subtracting prepaid fees and finance charges from the loan amount, since these fees are paid at closing simultaneously with the execution of the loan documents. This means that the amount financed is always less than the actual loan amount. The amount financed is provided to borrowers on the Truth in Lending Disclosure Statement, which is supplied after you apply for a home loan.

6. Add up prepaid fees. Prepaid fees are subtracted from the loan amount to arrive at the amount financed. These fees include prepaid points, homeowners association fees, mortgage insurance, and escrow company fees. They also include lender fees like underwriting fees, tax service, process fees, and prepaid interest. Add all of these fees up to arrive a total prepaid fees amount.

7. Subtract total prepaid fees from the loan amount. Subtract all of the prepaid fees from the loan amount to get your amount financed. This information will also be available on your Truth in Lending Disclosure Statement.[9]



Part 3 Using the Amount Financed.

1. Compare different lenders. If you have the amount financed for a mortgage loan, you can use this information to compare different lenders by looking at the associated fees and interest rates. This information is provided on the Truth in Lending Disclosure Statement, which is provided by all lenders to loan applicants. If you instead are financing another purchase, you can use your amount of financing required to apply to a variety of loans and look for the best combination of fees and interest rate.

2. Calculate the amount of interest you will pay. Your loan will likely be charged compound interest as you pay it off. Compound interest paid increases with the loan duration, the interest rate, and the compounding frequency (how often the compound interest is calculated each year). When you have the amount financed, you can use online interest calculators to determine how much interest you will pay on loans with different loan terms. A longer, higher-interest loan will end up costing you much more money in the long run than a shorter-term, low-interest loan.

For more information, see how to calculate interest payments.

3. Calculate loan payments. If you know how much you need to borrower (your loan amount), you can use this information to check for loan rates online. Check loan aggregator sites to find interest rates for the type and size of loan that you need. Then, input this information into an online loan calculator to figure out what your monthly payments might be. The Financial Industry Regulatory Authority (FINRA) provides a good calculator at http://apps.finra.org/Calcs/1/Loan.

4. Assess your ability to afford a purchase. Once you have an idea of the monthly loan payments, you can use this information to figure out how much you can afford to take out in a loan. Assess your ability to afford the loan by starting with your monthly after-tax income. Then, subtract any existing debt payments (mortgage, auto, etc.), monthly expenses like utilities and food, and savings or contributions to an emergency fund. The amount left is money that you can afford to pay towards a new loan's monthly payment.

Most financial planners suggest limiting house payments plus taxes and insurance to 25 to 28 percent of take-home income.

For example, if your household net income is $7,000 per month, your total outlay for housing should be no more than $1,960 per month.

5. Determine mortgage APR. Your actual mortgage annual percentage rate (APR) is calculated using your amount financed, rather than the loan amount. That is, your actual APR will be higher than the interest rate listed on your loan. To calculate your actual APR, find your monthly payment by using your stated interest rate, loan term, and loan amount and entering them into a loan calculator. Then, record your monthly payment and find a loan calculator that allows you to input your monthly payment, loan duration, and loan amount and receive an interest rate as the output. The output will be your actual APR.

A good calculator for this purpose can be found at http://www.thecalculatorsite.com/finance/calculators/interest-rate-calculator.php.



Question : Gomez family has just purchased a $2,574.54 microcomputer. They made a down payment of $574.54. Through the store's installemnt plan, they have agreed to pay $121.00 per month for the next 18 months. What is the amount financed?

Answer : The amount financed is the portion of the purchase price paid for by the installment plan. In this case, it is the $2,574.54 (purchase price) - $574.54 (the down payment), which is $2,000. The amount to be financed does not include the interest paid during the plan, which will be $178.

Question : Selling Price: $258,900. Loan term: 30 months on 5.25% interest rate. Down payment: $64,7325. What will be the amount to be financed?

Answer : You will be financing the selling price plus any fees, minus the down payment.



Tips.

When shopping for real estate, be sure that your price range reflects your planned amount financed. You may be able to afford more or less, depending upon your savings and the amount of a down payment.

Warnings.

The purchase agreement used by many car dealerships is notoriously complicated and confusing. Be certain that you understand every line item in the agreement before signing it when buying a new or used vehicle.

February 10, 2020

How to Calculate an Amount to Be Financed

How to Calculate an Amount to Be Financed.

The full price of a major purchase such as a house, boat or car is rarely financed. Most lenders for these types of loans require a down payment of some sort, usually expressed as a percentage. Additionally, mortgage loans list a different figure, "amount financed," which does not include prepaid fees paid to the lender. Knowing how to calculate an amount to be financed will help you make informed consumer decisions.



Part 1 Calculating a Commercial Loan Amount to be Financed.

1. Determine the selling price. For a vehicle, boat, or another type of commercial loan purchase this will be the amount you agree to pay for your new acquisition. It does not include other aspects of the deal such as the trade-in allowance, fees, taxes, and other closing costs.

2. Subtract any net trade-in allowance. For auto or boat purchases, among others, a dealer may offer a trade-in allowance or credit for giving them your old car or boat when you buy a new one. The value of this item, or a credit provided by the dealer, is then subtracted from what you owe on your new purchase. The net trade-in allowance is found by subtracting the amount still owed on your trade from the trade-in allowance offered by the dealership.

If the trade-in is high enough, dealers don't typically require an extra payment, such as a down payment.

Some dealers may allow you to use the trade-in value of your old vehicle to cover the required down payment on a new one (assuming the old one holds enough value).

3. Account for any cash rebates that are applied to the purchase price of the item. Dealers may also offer cash rebates as a way to incentivize purchases. These cash rebates are simply subtracted from the purchase price at closing. They also do not need to be included in the amount to be financed. Rebates may be provided to certain buyers, like students or military veterans, or may be specific to certain vehicles.

4. Settle on a loan amount. The amount left after rebates and trade-ins is the the amount owed. This amount must be either paid in full or borrowed from a lender and paid off in installments over time. From here, you can calculate the down payment if the lender requires one. For example, a lender might require 10 or 20 percent down on your purchase. Your loan amount is then the amount remaining after the down payment is subtracted out.

5. Use the loan amount as your amount financed. "Amount financed" is a term that is specific to home loans. All other loans simply refer to the amount financed as the total amount of the loan provided to the borrower. For these types of loans, simply use the loan amount after the down payment as calculated in this part as your amount financed.



Part 2 Determining the Amount Financed for a Mortgage Loan.

1. Negotiate a price for the asset with the seller. For a home, this will be your accepted offer price. For example, you might talk a homeowner down to selling a property for $100,000.

2. Subtract any deposits. Home purchases may have required a "good faith" deposit. Other purchases may also require a deposit be made while bidding on or reserving the item. This deposit is typically paid upon submission of an offer to purchase. This money is then subtracted from the purchase price, as you have already paid it.

Deposits are either returned (depending upon terms) or converted into the down payment amount and/or closing costs.

For example, if you put in a $3,000 good faith deposit on a $100,000 home, you would subtract this from the $100,000 to get $97,000.

3. Finalize the loan amount. The portion of the original purchase price remaining after these deductions is your loan amount, assuming you are planning on financing the purchase. This amount must be borrowed from a lender and then repaid over a period of time per a loan agreement. The loan amount is the amount borrowed from the lender, not the amount that will eventually be repaid in total, which also includes interest expenses.

4. Deduct the down payment amount. The down payment is paid in full upon closing the sale. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default. Therefore, it is not included in the amount financed.

Many mortgage lenders require 20 percent down on a real estate transaction, although you may be able to secure an FHA-backed mortgage requiring as little as 5 percent down payment. A lower loan balance results in less interest expense and the possible requirement of mortgage insurance.

A lower downpayment is expected on government- guaranteed loans such as FHA or VA because the lender has recourse to the Federal government in the event of default.

For example, if you paid a 20 percent down payment on the $100,000 house purchase, which would be $20,000, you would subtract this from your total.

Your good faith deposit may be applied towards your down payment. This means that the loan amount would still be the purchase price minus the down payment, which is $80,000 in this case.

5. Understand how amount financed differs from the loan amount. "Amount financed" is a term set by the 1968 Truth in Lending Act to describe how much credit is provided to a borrower when they take out a home loan. It is calculated by subtracting prepaid fees and finance charges from the loan amount, since these fees are paid at closing simultaneously with the execution of the loan documents. This means that the amount financed is always less than the actual loan amount. The amount financed is provided to borrowers on the Truth in Lending Disclosure Statement, which is supplied after you apply for a home loan.

6. Add up prepaid fees. Prepaid fees are subtracted from the loan amount to arrive at the amount financed. These fees include prepaid points, homeowners association fees, mortgage insurance, and escrow company fees. They also include lender fees like underwriting fees, tax service, process fees, and prepaid interest. Add all of these fees up to arrive a total prepaid fees amount.

7. Subtract total prepaid fees from the loan amount. Subtract all of the prepaid fees from the loan amount to get your amount financed. This information will also be available on your Truth in Lending Disclosure Statement.[9]



Part 3 Using the Amount Financed.

1. Compare different lenders. If you have the amount financed for a mortgage loan, you can use this information to compare different lenders by looking at the associated fees and interest rates. This information is provided on the Truth in Lending Disclosure Statement, which is provided by all lenders to loan applicants. If you instead are financing another purchase, you can use your amount of financing required to apply to a variety of loans and look for the best combination of fees and interest rate.

2. Calculate the amount of interest you will pay. Your loan will likely be charged compound interest as you pay it off. Compound interest paid increases with the loan duration, the interest rate, and the compounding frequency (how often the compound interest is calculated each year). When you have the amount financed, you can use online interest calculators to determine how much interest you will pay on loans with different loan terms. A longer, higher-interest loan will end up costing you much more money in the long run than a shorter-term, low-interest loan.

For more information, see how to calculate interest payments.

3. Calculate loan payments. If you know how much you need to borrower (your loan amount), you can use this information to check for loan rates online. Check loan aggregator sites to find interest rates for the type and size of loan that you need. Then, input this information into an online loan calculator to figure out what your monthly payments might be. The Financial Industry Regulatory Authority (FINRA) provides a good calculator at http://apps.finra.org/Calcs/1/Loan.

4. Assess your ability to afford a purchase. Once you have an idea of the monthly loan payments, you can use this information to figure out how much you can afford to take out in a loan. Assess your ability to afford the loan by starting with your monthly after-tax income. Then, subtract any existing debt payments (mortgage, auto, etc.), monthly expenses like utilities and food, and savings or contributions to an emergency fund. The amount left is money that you can afford to pay towards a new loan's monthly payment.

Most financial planners suggest limiting house payments plus taxes and insurance to 25 to 28 percent of take-home income.

For example, if your household net income is $7,000 per month, your total outlay for housing should be no more than $1,960 per month.

5. Determine mortgage APR. Your actual mortgage annual percentage rate (APR) is calculated using your amount financed, rather than the loan amount. That is, your actual APR will be higher than the interest rate listed on your loan. To calculate your actual APR, find your monthly payment by using your stated interest rate, loan term, and loan amount and entering them into a loan calculator. Then, record your monthly payment and find a loan calculator that allows you to input your monthly payment, loan duration, and loan amount and receive an interest rate as the output. The output will be your actual APR.

A good calculator for this purpose can be found at http://www.thecalculatorsite.com/finance/calculators/interest-rate-calculator.php.



Question : Gomez family has just purchased a $2,574.54 microcomputer. They made a down payment of $574.54. Through the store's installemnt plan, they have agreed to pay $121.00 per month for the next 18 months. What is the amount financed?

Answer : The amount financed is the portion of the purchase price paid for by the installment plan. In this case, it is the $2,574.54 (purchase price) - $574.54 (the down payment), which is $2,000. The amount to be financed does not include the interest paid during the plan, which will be $178.

Question : Selling Price: $258,900. Loan term: 30 months on 5.25% interest rate. Down payment: $64,7325. What will be the amount to be financed?

Answer : You will be financing the selling price plus any fees, minus the down payment.



Tips.

When shopping for real estate, be sure that your price range reflects your planned amount financed. You may be able to afford more or less, depending upon your savings and the amount of a down payment.

Warnings.

The purchase agreement used by many car dealerships is notoriously complicated and confusing. Be certain that you understand every line item in the agreement before signing it when buying a new or used vehicle.

February 10, 2020

how to owner finance a home

How to Owner Finance a Home.

There are many benefits to an owner financing deal when purchasing a home. Both the buyer and seller can take advantage of the deal. But there is a specific process to owner financing, along with important factors to consider. You should begin by hiring people who can help you, such as an appraiser, Residential Mortgage Loan Originator, and lawyer.

Part 1 Hiring People to Help You.

1. Hire an appraiser. Both the buyer and the seller should hire their own appraiser to determine the value of the house. The seller receives an appraisal in order to select a price for the home, and the buyer gets an appraisal to confirm that the selling price is fair. You can find an appraiser in the following ways:

look in the Yellow Pages, ask for a referral from a mortgage company, bank, or realtor, contact your state’s licensing agency.

2. Hire a real estate attorney. Both parties should work closely with a real estate attorney. A real estate attorney can draft all of the necessary paperwork. The attorney can also protect your interests. For example, the buyer can include a protection clause just in case the property has to be sold in response to a life changing event, job relocation or loss, divorce or death.

You can get a referral to a real estate attorney by contacting your local or state bar association. Bar associations are organizations made up of attorneys, and they often provide referrals to their members or can help you find an attorney.

3. Get advice from a Residential Mortgage Loan Originator (RMLO). A Residential Mortgage Loan Originator can give you advice on how to manage owner financing in a way that is transparent and compliant with regulations. When you owner finance a home, you are essentially providing the buyer a loan until they complete their payments on the home. Since you want your agreement to be clear and binding, it's good to work with a mortgage professional.

Your RMLO can help ensure that your owner financing documents are compliant with the Safe Act and Dodd Frank Act.

Make sure your RMLO is properly licensed by your state. Check with your state’s Department of Business Oversight or equivalent state office to check.

Part 2 Preparing for the Sale.

1. Get approval if you still have a mortgage. Owner financed sales work best when the owner has title free and clear or the owner can pay off the mortgage with the buyer’s down payment. However, if the seller still has a large mortgage, they need to get their lender’s approval.

Check whether you can pay off the mortgage with the buyer’s down payment. If not, then contact your mortgage company and discuss that you want to sell the house.

2. Consider performing background checks to control risk. Both the seller and buyer should perform background checks on each other. Many owner financed sales are short-term, for five years or so. At the end of the term, the buyer is expected to refinance and then make a “balloon payment,” paying off the balance of the loan. As a seller, you will want assurance that a buyer can get a traditional loan at the end of the contract term, which means you definitely want to check their credit history and employment.

In fact, sellers should consider having buyers complete a loan application. You can verify references, employment history, and other financial information.

Buyers also benefit from background checks. For example, they might discover that the seller has been financially irresponsible. If the seller still holds a mortgage on the home, there is a risk of default.

3. Determine loan details. One advantage of an owner financed sale is that the seller controls details about the financing. Because the seller is assuming a lot of risk, they should come up with terms that protect them. Talk with your attorney about what the terms of the loan should be. Consider the following.

a substantial down payment (usually 10% or more), an interest rate that is higher than usual (though less than your state’s maximum allowable interest rate), a loan term you are comfortable with.

4. Ask your lawyer draft a purchase and sale agreement. You want to protect yourself legally by making sure that you have all of the necessary legal documents prepared. Your real estate attorney can draft a purchase and sale agreement, which both seller and buyer will sign. This document provides information about the following:

closing date, name of the title insurance company, final sale price, details about a down payment, if any.

contingencies which must be met for the sale to proceed, such as an acceptable inspection and a clear title report.

5. Draft a promissory note. The seller also needs the buyer to sign a promissory note or other financial instrument. Your lawyer can draft this document for you. It should contain the following information.

borrower’s name, property address, amount of the loan, interest rate, repayment schedule, terms for late or missed payments, consequences of default.

6. Have your lawyer draft a mortgage. The mortgage provides security for the loan. Your lawyer should also draft this document for you. The mortgage is what allows you to repossess the house should the buyer default on the loan.

Part 3 Completing the Sale.

1. Agree on an interest rate and term with the buyer. Your RMLO partner will calculate the agreed upon amount based on a specific period of time and if you have agreed on a balloon payment. Remember that not every state allows balloon payments.

For example, you can base monthly payment amount on a hypothetical 30-year mortgage, but schedule payment of the remaining amount in 5 years (balloon). The RMLO will also create required disclosures for the seller/lender.

2. Close the sale. Both the buyer and seller should have independent attorneys who can review all paperwork to make sure that it is complete. You should schedule a closing to sign everything and make copies.

3. Hire a loan servicer to manage payments. The seller should talk to their lawyer about whether they want to hire a loan servicer. If they do, then their lawyer can recommend someone. A loan servicer provides many important services.

collects the mortgage payments, sets up an escrow, handles tax statements and payments, makes insurance payments, processes payment changes, performs collection services, if necessary.

4. Record your mortgage or deed of trust. You can record it in the county land records office. Doing so will allow the buyer and the seller to take advantage of tax deductions. Making the deal official in this manner also proves that the sale took place.

Part 4 Deciding Whether an Owner Financed Sale is Right.

1. Analyze your situation as a seller. Owner financed sales are rare, and you shouldn’t jump into one until you have thoroughly considered your situation. Think about the following.

You usually must own the house free and clear of any mortgage. Otherwise, you will need your lender to give you permission to sell.

Taxes can be complicated and you’ll want to hire a tax professional to help you.

You might have to go through the foreclosure process if the buyer stops making payments. This can be costly and time-consuming.

However, you may make much more money on an owner financed sale than if you sell the traditional way.

2. Determine if an owner financed sale is ideal as a buyer. Buyers usually like owner financed sales because a seller might be less choosy than a bank or mortgage lender. However, you should consider the following.

You might have to come up with a larger down payment than you normally would. The owner-seller is taking a risk by financing your sale, and in return they might want a larger down payment or higher interest.

Owner financed sales often close faster than other sales.

You need to be sure you can make the balloon payment if one is written into the contract. If you break the contract, then you could lose the house and all of the payments you have made up to that point.

3. Talk with professionals if you have questions. In addition to working with a real estate lawyer, you might want to meet with a tax professional, such as a certified public accountant. Ask about the tax benefits of an owner financed sale compared to selling outright.

If you are a buyer, then you should talk about how to raise your credit score so that you qualify for a traditional mortgage when the balloon payment comes due.

4. Make sure your buyer can cover the balloon payment. Owner financing is most often used when the buyer or property does not qualify for a conventional loan. This means the buyer may not have the resources to cover the balloon payment at the end of your term. Discuss your buyer's options before entering into a contract with them.

If you are a buyer, make sure that you have your options for paying the balloon payment lined up before you agree to the seller's terms.

5. Consider a lease-to-own option. This option is often more advantageous for the buyer and less complicated for the seller. You and the person interested in your home will lock in a potential sale price for the home, as well as a lease agreement ranging from 2 to 5 years. During that time, the person will pay you rent on the home, with a portion of that rent going toward a down payment on the house. After the lease ends, the person can choose to proceed with the sale as arranged, or they can opt to walk away.

If they walk away, they don't get a refund on the extra money they paid toward the down payment.

If they do walk away, you'll need to relist your home.

Tips.

The seller should ask that the buyer purchase homeowner's insurance and confirm the seller as mortgagee.

The seller should establish a land contract. With a land contract, title doesn’t pass to the buyer until the final payment has been made. Discuss this option with your attorney and see if such a contract is feasible.

December 03, 2019

How to Owner Finance a Home

How to Owner Finance a Home.

There are many benefits to an owner financing deal when purchasing a home. Both the buyer and seller can take advantage of the deal. But there is a specific process to owner financing, along with important factors to consider. You should begin by hiring people who can help you, such as an appraiser, Residential Mortgage Loan Originator, and lawyer.

Part 1 Hiring People to Help You.

1. Hire an appraiser. Both the buyer and the seller should hire their own appraiser to determine the value of the house. The seller receives an appraisal in order to select a price for the home, and the buyer gets an appraisal to confirm that the selling price is fair. You can find an appraiser in the following ways:

look in the Yellow Pages, ask for a referral from a mortgage company, bank, or realtor, contact your state’s licensing agency.

2. Hire a real estate attorney. Both parties should work closely with a real estate attorney. A real estate attorney can draft all of the necessary paperwork. The attorney can also protect your interests. For example, the buyer can include a protection clause just in case the property has to be sold in response to a life changing event, job relocation or loss, divorce or death.

You can get a referral to a real estate attorney by contacting your local or state bar association. Bar associations are organizations made up of attorneys, and they often provide referrals to their members or can help you find an attorney.

3. Get advice from a Residential Mortgage Loan Originator (RMLO). A Residential Mortgage Loan Originator can give you advice on how to manage owner financing in a way that is transparent and compliant with regulations. When you owner finance a home, you are essentially providing the buyer a loan until they complete their payments on the home. Since you want your agreement to be clear and binding, it's good to work with a mortgage professional.

Your RMLO can help ensure that your owner financing documents are compliant with the Safe Act and Dodd Frank Act.

Make sure your RMLO is properly licensed by your state. Check with your state’s Department of Business Oversight or equivalent state office to check.

Part 2 Preparing for the Sale.

1. Get approval if you still have a mortgage. Owner financed sales work best when the owner has title free and clear or the owner can pay off the mortgage with the buyer’s down payment. However, if the seller still has a large mortgage, they need to get their lender’s approval.

Check whether you can pay off the mortgage with the buyer’s down payment. If not, then contact your mortgage company and discuss that you want to sell the house.

2. Consider performing background checks to control risk. Both the seller and buyer should perform background checks on each other. Many owner financed sales are short-term, for five years or so. At the end of the term, the buyer is expected to refinance and then make a “balloon payment,” paying off the balance of the loan. As a seller, you will want assurance that a buyer can get a traditional loan at the end of the contract term, which means you definitely want to check their credit history and employment.

In fact, sellers should consider having buyers complete a loan application. You can verify references, employment history, and other financial information.

Buyers also benefit from background checks. For example, they might discover that the seller has been financially irresponsible. If the seller still holds a mortgage on the home, there is a risk of default.

3. Determine loan details. One advantage of an owner financed sale is that the seller controls details about the financing. Because the seller is assuming a lot of risk, they should come up with terms that protect them. Talk with your attorney about what the terms of the loan should be. Consider the following.

a substantial down payment (usually 10% or more), an interest rate that is higher than usual (though less than your state’s maximum allowable interest rate), a loan term you are comfortable with.

4. Ask your lawyer draft a purchase and sale agreement. You want to protect yourself legally by making sure that you have all of the necessary legal documents prepared. Your real estate attorney can draft a purchase and sale agreement, which both seller and buyer will sign. This document provides information about the following:

closing date, name of the title insurance company, final sale price, details about a down payment, if any.

contingencies which must be met for the sale to proceed, such as an acceptable inspection and a clear title report.

5. Draft a promissory note. The seller also needs the buyer to sign a promissory note or other financial instrument. Your lawyer can draft this document for you. It should contain the following information.

borrower’s name, property address, amount of the loan, interest rate, repayment schedule, terms for late or missed payments, consequences of default.

6. Have your lawyer draft a mortgage. The mortgage provides security for the loan. Your lawyer should also draft this document for you. The mortgage is what allows you to repossess the house should the buyer default on the loan.

Part 3 Completing the Sale.

1. Agree on an interest rate and term with the buyer. Your RMLO partner will calculate the agreed upon amount based on a specific period of time and if you have agreed on a balloon payment. Remember that not every state allows balloon payments.

For example, you can base monthly payment amount on a hypothetical 30-year mortgage, but schedule payment of the remaining amount in 5 years (balloon). The RMLO will also create required disclosures for the seller/lender.

2. Close the sale. Both the buyer and seller should have independent attorneys who can review all paperwork to make sure that it is complete. You should schedule a closing to sign everything and make copies.

3. Hire a loan servicer to manage payments. The seller should talk to their lawyer about whether they want to hire a loan servicer. If they do, then their lawyer can recommend someone. A loan servicer provides many important services.

collects the mortgage payments, sets up an escrow, handles tax statements and payments, makes insurance payments, processes payment changes, performs collection services, if necessary.

4. Record your mortgage or deed of trust. You can record it in the county land records office. Doing so will allow the buyer and the seller to take advantage of tax deductions. Making the deal official in this manner also proves that the sale took place.

Part 4 Deciding Whether an Owner Financed Sale is Right.

1. Analyze your situation as a seller. Owner financed sales are rare, and you shouldn’t jump into one until you have thoroughly considered your situation. Think about the following.

You usually must own the house free and clear of any mortgage. Otherwise, you will need your lender to give you permission to sell.

Taxes can be complicated and you’ll want to hire a tax professional to help you.

You might have to go through the foreclosure process if the buyer stops making payments. This can be costly and time-consuming.

However, you may make much more money on an owner financed sale than if you sell the traditional way.

2. Determine if an owner financed sale is ideal as a buyer. Buyers usually like owner financed sales because a seller might be less choosy than a bank or mortgage lender. However, you should consider the following.

You might have to come up with a larger down payment than you normally would. The owner-seller is taking a risk by financing your sale, and in return they might want a larger down payment or higher interest.

Owner financed sales often close faster than other sales.

You need to be sure you can make the balloon payment if one is written into the contract. If you break the contract, then you could lose the house and all of the payments you have made up to that point.

3. Talk with professionals if you have questions. In addition to working with a real estate lawyer, you might want to meet with a tax professional, such as a certified public accountant. Ask about the tax benefits of an owner financed sale compared to selling outright.

If you are a buyer, then you should talk about how to raise your credit score so that you qualify for a traditional mortgage when the balloon payment comes due.

4. Make sure your buyer can cover the balloon payment. Owner financing is most often used when the buyer or property does not qualify for a conventional loan. This means the buyer may not have the resources to cover the balloon payment at the end of your term. Discuss your buyer's options before entering into a contract with them.

If you are a buyer, make sure that you have your options for paying the balloon payment lined up before you agree to the seller's terms.

5. Consider a lease-to-own option. This option is often more advantageous for the buyer and less complicated for the seller. You and the person interested in your home will lock in a potential sale price for the home, as well as a lease agreement ranging from 2 to 5 years. During that time, the person will pay you rent on the home, with a portion of that rent going toward a down payment on the house. After the lease ends, the person can choose to proceed with the sale as arranged, or they can opt to walk away.

If they walk away, they don't get a refund on the extra money they paid toward the down payment.

If they do walk away, you'll need to relist your home.

Tips.

The seller should ask that the buyer purchase homeowner's insurance and confirm the seller as mortgagee.

The seller should establish a land contract. With a land contract, title doesn’t pass to the buyer until the final payment has been made. Discuss this option with your attorney and see if such a contract is feasible.

December 03, 2019

How to Finance a Business Purchase

How to Finance a Business Purchase.

Buying an existing business can be convenient in a number of ways. You're buying into a proven business model with existing customers, marketing, and products. With this framework in place, you can also begin repaying your purchase expenses immediately with the profits earned by the business. However, financing that business purchase in the first place can be just as expensive as starting a business yourself. Consider the following methods for coming up with the capital to purchase a business and choose those that best suit your needs.





Taking Out a Loan



Investigate SBA loans. The Small Business Administration (SBA) guarantees loans to small business to help them get started and expand their operations. To get started on the road towards acquiring SBA financing, visit a local bank or financial institution that provides SBA loans. The SBA loan makes it easier for you to acquire financing, as part of the loan is repaid by the SBA if you fail to make payments. Specifically, the loan program you will be looking for is the SBA Basic 7(a) loan program, which is used for acquiring or starting new businesses. To qualify for this type of loan, you must.

Own or seek to own a small business as defined by the SBA. This information can be found on their website.

Plan to operate for profit.

Plan to operate within the United States or its possessions.

Have your own assets invested in the business.

Show a need for the loan.

Not owe the US government any money.



Meet with financial institutions. Financing is also available through local lending institutions, like banks and credit unions. However, this type of lending can be very difficult to secure, particularly if you have less-than-stellar credit or if there are not significant personal or business assets that can be used as collateral. To qualify for a traditional bank loan, you will need demonstrable management experience, strong existing cash flows, experience in the industry, and a high personal credit score. It may also be easier for you to obtain a loan if you have an existing, strong relationship with the bank providing the loan.

If you are a woman, veteran, or minority, banks may have special lending programs that you can qualify for.



Assess the collateral you can provide. Your collateral is the assets, either yours or the business's, that you can provide as insurance in case you default on your loan. For some business loans, these may need to be worth as much as 50 to 70 percent of the loan value. When providing collateral for the banks to use, you can include any of the following:

Equity in your own home.

Assets owned by the business, like accounts receivable and inventory.

A personal guarantee. This essentially means that, in the event of a default, you are personally liable to repay a certain amount of the loan value.

Most lenders, including the SBA, require a personal guarantee for a loan in addition to any collateral pledged. This is because they would prefer avoiding have to take possession of the collateral and go through the subsequent sale.



Get pre-qualified for several loans. Before finalizing the purchase of the business, you will need one or several letters of pre-qualification for loans. This means going through the loan process with each lender and getting the go-ahead from them to purchase the business. You can then show the letters to the seller and finalize the purchase, at which point you will need to actually take out one of the loans that you are pre-qualified for.

Getting pre-qualified for several loans is advantageous in case the lending requirements change between your pre-qualification and the close of the sale.

You will need to be pre-qualified for more than the purchase price of the business. You should also include about 90 days of working capital (money used to keep the business functioning, like utilities and inventory purchasing money). You can work with the current owner to assess how much is needed.



Consider alternative loan options. There are many other sources of loans available to finance the initial purchase of a business. For some people, there may be an opportunity to borrow money from friends or family. However, bear in mind that this may damage your relationship with that person if things go south. Some other options you can consider include:

Peer-to-peer (P2P) financing. Online lending markets like LendingClub.com and Prosper.com allow you to borrow small amounts (generally less than $25,000) from other people. However, rates on these sites are typically higher than what a bank or the SBA could offer you.

Microloans. Microloans are for smaller amounts that traditional business loans (usually less than $50,000) and have shorter durations (under six years). Check with the SBA or a microlending specialist to investigate your options.







Financing the Purchase With Your Own Assets.



Use your own savings. The easiest and cheapest way to finance your own business is with your own personal savings. This includes any savings accounts, CDs, investment accounts, or other liquid accounts you hold. By using the money from these accounts to finance your personal, you can avoid having to work with partners, investors, or lenders when running your business. However, it is rare that an individual has enough money in these accounts to purchase a business.



Sell any valuable assets you currently own. Another way to raise money is to sell off valuable assets that you own. Parcels of land, non-essential vehicles, and boats can all be sold to raise this type of money.



Borrow against your home equity. You can borrow against the value of your home using a second mortgage or a home equity line of credit (HELOC). However, this requires having enough equity in your home in the first place. More importantly, it also introduces the risk that, in the event of the business's default, your house may be foreclosed upon by the lender. Consider the risks and try every other options available to you before pursuing this type of financing.



Avoid purchasing the business with your retirement savings. While it is possible to roll your IRA or 401(k) savings balances into a business venture without taking a tax hit, doing so is incredibly risky. If your business fails to perform as expected, you could lose all of the money you have saved for retirement. Personal finance experts recommend against using this as a method of business financing.







Bringing On Investors or Partners.



Consider finding a partner or several of them. A partner is someone who provides some initial purchase money for the business in exchange for an ownership share. Your partner will likely want to be involved in the business in some way, so make sure to only take on a partner that you can work well with. And being personally close with someone doesn't make them a good partner; sometimes a trusted or knowledgable co-worker or acquaintance can make a better partner than a friend or family member.

In addition, make sure to draw up a legal contract that clarifies the terms of the partnership. This agreement should list how disputes are settled, how major decisions are made, and exactly how profits are divided.



Work with a silent partner. A silent partner is one that contributes capital to the business, but has no say in its operations. However, many silent partners eventually want to have a say in how the business is run. Again, to ensure that this relationship works as planned, draw up a partnership agreement that specifies the terms of your partnership in detail.



Bring on angel investors. An angel investor is a wealthy private investor who gives start-up capital to new businesses and new business owners in exchange for equity in that business. Businesses with angel investors benefits from the angel investor's industry expertise, business contacts, and financial resources. Locating angel investors, however, can be difficult. You'll have to locate a high net worth individual who shares your passion for the business you are buying and its industry. Then, you'll have to convince them of your own management skill and your ability to give them a good return on their money.

Angel Investors can be located by visiting the Angel Capital Association's website.



Engage in equity crowdfunding. Equity crowdfunding, which involves selling small stakes in your business to a large number of small investors, is a relative newcomer in the world of business financing. While equity crowdfunding has been around for years, operating through sites like SeedInvest, it has recently become tightly regulated by the Securities and Exchange Commission (SEC). Equity crowdfunding can be an effective way to raise money, but only with the proper guidance, as following SEC guidelines can be complicated.







Getting Seller Financing



Consider the benefits and drawbacks of seller financing. Seller financing, also called owner financing, is a purchase arrangement in which you repay the sale price of the business directly to its previous owner over several years. For the buyer, this provides some flexibility in repaying the loan, such as negotiating a longer repayment period, a temporary reprieve from payments, or reducing the price in exchange for letting the owner keep some equity in the business. However, this type of arrangement is typically more expensive, with the owner charging a higher interest rate than the bank would charge.

Ideally, the buyer should negotiate an arrangement where all or a portion of the loan financed by the seller may be contingent upon the profits reached and payable over a limited term. This protects the buyer in case profits are not as high as expected.

Obtaining seller financing may give you more power in negotiating down the price of the business.

Doing so also gives the seller reason to help you out more in running and managing the business.[



Ask the seller if they would consider seller financing. Start by asking the seller directly if they would consider seller financing. It may help if you explain to them that this will result in their getting more money over time, as they get to keep the interest on your loan (rather than the bank keeping it). If they agree, you can begin negotiating a contract.

If possible, avoid securing the seller with assets purchased. This gives you a cushion if additional financing is needed to get the business is running smoothly.



Negotiate a contract. Work with the seller to form the terms of sale. Start by offering to make a down payment with what you can gather on your own, say 10 to 20 percent of the sale price. Try to offer as large of a down payment as you can afford; this will only help you and save you money in the long run. Then discuss a repayment period and interest rate. Try to negotiate a longer repayment period and lower interest rate to make sure that you can afford the payments.

You may be able to agree on a large, balloon payment in a number of years. This will reduce your monthly payments. Then, you can get a bank loan or use your savings to cover the balloon payment.

Alternately, where a C corporation is involved in the purchase, issuing preferred stock may be a better option than debt for the buyer when repaying the balloon payment.



Have a lawyer review the contract. Ideally, you should have an attorney that specializes in business contracts draw up the contract. However, you can also have one review the contract to ensure that your interests are represented and that there are no surprises waiting for you in the wording of the contract. You may also want to have an accountant review the financials of the deal to make sure everything checks out.

The lawyer, and possibly an accountant, should confirm the validity of the financial statements, specifically the identity, value and location of assets and liabilities.



Finalize the deal. Once you've been assured that the contract is right for both you and the seller, close the deal and take control of the business. With seller financing, you'll likely be able to convince the previous owner to help you out with getting started as the manager of your new business.

November 14, 2019

how to finance a business purchase

How to Finance a Business Purchase.

Buying an existing business can be convenient in a number of ways. You're buying into a proven business model with existing customers, marketing, and products. With this framework in place, you can also begin repaying your purchase expenses immediately with the profits earned by the business. However, financing that business purchase in the first place can be just as expensive as starting a business yourself. Consider the following methods for coming up with the capital to purchase a business and choose those that best suit your needs.





Taking Out a Loan



Investigate SBA loans. The Small Business Administration (SBA) guarantees loans to small business to help them get started and expand their operations. To get started on the road towards acquiring SBA financing, visit a local bank or financial institution that provides SBA loans. The SBA loan makes it easier for you to acquire financing, as part of the loan is repaid by the SBA if you fail to make payments. Specifically, the loan program you will be looking for is the SBA Basic 7(a) loan program, which is used for acquiring or starting new businesses. To qualify for this type of loan, you must.

Own or seek to own a small business as defined by the SBA. This information can be found on their website.

Plan to operate for profit.

Plan to operate within the United States or its possessions.

Have your own assets invested in the business.

Show a need for the loan.

Not owe the US government any money.



Meet with financial institutions. Financing is also available through local lending institutions, like banks and credit unions. However, this type of lending can be very difficult to secure, particularly if you have less-than-stellar credit or if there are not significant personal or business assets that can be used as collateral. To qualify for a traditional bank loan, you will need demonstrable management experience, strong existing cash flows, experience in the industry, and a high personal credit score. It may also be easier for you to obtain a loan if you have an existing, strong relationship with the bank providing the loan.

If you are a woman, veteran, or minority, banks may have special lending programs that you can qualify for.



Assess the collateral you can provide. Your collateral is the assets, either yours or the business's, that you can provide as insurance in case you default on your loan. For some business loans, these may need to be worth as much as 50 to 70 percent of the loan value. When providing collateral for the banks to use, you can include any of the following:

Equity in your own home.

Assets owned by the business, like accounts receivable and inventory.

A personal guarantee. This essentially means that, in the event of a default, you are personally liable to repay a certain amount of the loan value.

Most lenders, including the SBA, require a personal guarantee for a loan in addition to any collateral pledged. This is because they would prefer avoiding have to take possession of the collateral and go through the subsequent sale.



Get pre-qualified for several loans. Before finalizing the purchase of the business, you will need one or several letters of pre-qualification for loans. This means going through the loan process with each lender and getting the go-ahead from them to purchase the business. You can then show the letters to the seller and finalize the purchase, at which point you will need to actually take out one of the loans that you are pre-qualified for.

Getting pre-qualified for several loans is advantageous in case the lending requirements change between your pre-qualification and the close of the sale.

You will need to be pre-qualified for more than the purchase price of the business. You should also include about 90 days of working capital (money used to keep the business functioning, like utilities and inventory purchasing money). You can work with the current owner to assess how much is needed.



Consider alternative loan options. There are many other sources of loans available to finance the initial purchase of a business. For some people, there may be an opportunity to borrow money from friends or family. However, bear in mind that this may damage your relationship with that person if things go south. Some other options you can consider include:

Peer-to-peer (P2P) financing. Online lending markets like LendingClub.com and Prosper.com allow you to borrow small amounts (generally less than $25,000) from other people. However, rates on these sites are typically higher than what a bank or the SBA could offer you.

Microloans. Microloans are for smaller amounts that traditional business loans (usually less than $50,000) and have shorter durations (under six years). Check with the SBA or a microlending specialist to investigate your options.







Financing the Purchase With Your Own Assets.



Use your own savings. The easiest and cheapest way to finance your own business is with your own personal savings. This includes any savings accounts, CDs, investment accounts, or other liquid accounts you hold. By using the money from these accounts to finance your personal, you can avoid having to work with partners, investors, or lenders when running your business. However, it is rare that an individual has enough money in these accounts to purchase a business.



Sell any valuable assets you currently own. Another way to raise money is to sell off valuable assets that you own. Parcels of land, non-essential vehicles, and boats can all be sold to raise this type of money.



Borrow against your home equity. You can borrow against the value of your home using a second mortgage or a home equity line of credit (HELOC). However, this requires having enough equity in your home in the first place. More importantly, it also introduces the risk that, in the event of the business's default, your house may be foreclosed upon by the lender. Consider the risks and try every other options available to you before pursuing this type of financing.



Avoid purchasing the business with your retirement savings. While it is possible to roll your IRA or 401(k) savings balances into a business venture without taking a tax hit, doing so is incredibly risky. If your business fails to perform as expected, you could lose all of the money you have saved for retirement. Personal finance experts recommend against using this as a method of business financing.







Bringing On Investors or Partners.



Consider finding a partner or several of them. A partner is someone who provides some initial purchase money for the business in exchange for an ownership share. Your partner will likely want to be involved in the business in some way, so make sure to only take on a partner that you can work well with. And being personally close with someone doesn't make them a good partner; sometimes a trusted or knowledgable co-worker or acquaintance can make a better partner than a friend or family member.

In addition, make sure to draw up a legal contract that clarifies the terms of the partnership. This agreement should list how disputes are settled, how major decisions are made, and exactly how profits are divided.



Work with a silent partner. A silent partner is one that contributes capital to the business, but has no say in its operations. However, many silent partners eventually want to have a say in how the business is run. Again, to ensure that this relationship works as planned, draw up a partnership agreement that specifies the terms of your partnership in detail.



Bring on angel investors. An angel investor is a wealthy private investor who gives start-up capital to new businesses and new business owners in exchange for equity in that business. Businesses with angel investors benefits from the angel investor's industry expertise, business contacts, and financial resources. Locating angel investors, however, can be difficult. You'll have to locate a high net worth individual who shares your passion for the business you are buying and its industry. Then, you'll have to convince them of your own management skill and your ability to give them a good return on their money.

Angel Investors can be located by visiting the Angel Capital Association's website.



Engage in equity crowdfunding. Equity crowdfunding, which involves selling small stakes in your business to a large number of small investors, is a relative newcomer in the world of business financing. While equity crowdfunding has been around for years, operating through sites like SeedInvest, it has recently become tightly regulated by the Securities and Exchange Commission (SEC). Equity crowdfunding can be an effective way to raise money, but only with the proper guidance, as following SEC guidelines can be complicated.







Getting Seller Financing



Consider the benefits and drawbacks of seller financing. Seller financing, also called owner financing, is a purchase arrangement in which you repay the sale price of the business directly to its previous owner over several years. For the buyer, this provides some flexibility in repaying the loan, such as negotiating a longer repayment period, a temporary reprieve from payments, or reducing the price in exchange for letting the owner keep some equity in the business. However, this type of arrangement is typically more expensive, with the owner charging a higher interest rate than the bank would charge.

Ideally, the buyer should negotiate an arrangement where all or a portion of the loan financed by the seller may be contingent upon the profits reached and payable over a limited term. This protects the buyer in case profits are not as high as expected.

Obtaining seller financing may give you more power in negotiating down the price of the business.

Doing so also gives the seller reason to help you out more in running and managing the business.[



Ask the seller if they would consider seller financing. Start by asking the seller directly if they would consider seller financing. It may help if you explain to them that this will result in their getting more money over time, as they get to keep the interest on your loan (rather than the bank keeping it). If they agree, you can begin negotiating a contract.

If possible, avoid securing the seller with assets purchased. This gives you a cushion if additional financing is needed to get the business is running smoothly.



Negotiate a contract. Work with the seller to form the terms of sale. Start by offering to make a down payment with what you can gather on your own, say 10 to 20 percent of the sale price. Try to offer as large of a down payment as you can afford; this will only help you and save you money in the long run. Then discuss a repayment period and interest rate. Try to negotiate a longer repayment period and lower interest rate to make sure that you can afford the payments.

You may be able to agree on a large, balloon payment in a number of years. This will reduce your monthly payments. Then, you can get a bank loan or use your savings to cover the balloon payment.

Alternately, where a C corporation is involved in the purchase, issuing preferred stock may be a better option than debt for the buyer when repaying the balloon payment.



Have a lawyer review the contract. Ideally, you should have an attorney that specializes in business contracts draw up the contract. However, you can also have one review the contract to ensure that your interests are represented and that there are no surprises waiting for you in the wording of the contract. You may also want to have an accountant review the financials of the deal to make sure everything checks out.

The lawyer, and possibly an accountant, should confirm the validity of the financial statements, specifically the identity, value and location of assets and liabilities.



Finalize the deal. Once you've been assured that the contract is right for both you and the seller, close the deal and take control of the business. With seller financing, you'll likely be able to convince the previous owner to help you out with getting started as the manager of your new business.

November 13, 2019

how to finance a business purchase

How to Finance a Business Purchase.

Buying an existing business can be convenient in a number of ways. You're buying into a proven business model with existing customers, marketing, and products. With this framework in place, you can also begin repaying your purchase expenses immediately with the profits earned by the business. However, financing that business purchase in the first place can be just as expensive as starting a business yourself. Consider the following methods for coming up with the capital to purchase a business and choose those that best suit your needs.



Method 1 Taking Out a Loan.



1. Investigate SBA loans. The Small Business Administration (SBA) guarantees loans to small business to help them get started and expand their operations. To get started on the road towards acquiring SBA financing, visit a local bank or financial institution that provides SBA loans. The SBA loan makes it easier for you to acquire financing, as part of the loan is repaid by the SBA if you fail to make payments. Specifically, the loan program you will be looking for is the SBA Basic 7(a) loan program, which is used for acquiring or starting new businesses. To qualify for this type of loan, you must.

Own or seek to own a small business as defined by the SBA. This information can be found on their website.

Plan to operate for profit.

Plan to operate within the United States or its possessions.

Have your own assets invested in the business.

Show a need for the loan.

Not owe the US government any money.



2. Meet with financial institutions. Financing is also available through local lending institutions, like banks and credit unions. However, this type of lending can be very difficult to secure, particularly if you have less-than-stellar credit or if there are not significant personal or business assets that can be used as collateral. To qualify for a traditional bank loan, you will need demonstrable management experience, strong existing cash flows, experience in the industry, and a high personal credit score. It may also be easier for you to obtain a loan if you have an existing, strong relationship with the bank providing the loan.

If you are a woman, veteran, or minority, banks may have special lending programs that you can qualify for.



3. Assess the collateral you can provide. Your collateral is the assets, either yours or the business's, that you can provide as insurance in case you default on your loan. For some business loans, these may need to be worth as much as 50 to 70 percent of the loan value. When providing collateral for the banks to use, you can include any of the following:

Equity in your own home.

Assets owned by the business, like accounts receivable and inventory.

A personal guarantee. This essentially means that, in the event of a default, you are personally liable to repay a certain amount of the loan value.

Most lenders, including the SBA, require a personal guarantee for a loan in addition to any collateral pledged. This is because they would prefer avoiding have to take possession of the collateral and go through the subsequent sale.



4. Get pre-qualified for several loans. Before finalizing the purchase of the business, you will need one or several letters of pre-qualification for loans. This means going through the loan process with each lender and getting the go-ahead from them to purchase the business. You can then show the letters to the seller and finalize the purchase, at which point you will need to actually take out one of the loans that you are pre-qualified for.

Getting pre-qualified for several loans is advantageous in case the lending requirements change between your pre-qualification and the close of the sale.

You will need to be pre-qualified for more than the purchase price of the business. You should also include about 90 days of working capital (money used to keep the business functioning, like utilities and inventory purchasing money). You can work with the current owner to assess how much is needed.



5. Consider alternative loan options. There are many other sources of loans available to finance the initial purchase of a business. For some people, there may be an opportunity to borrow money from friends or family. However, bear in mind that this may damage your relationship with that person if things go south. Some other options you can consider include:

Peer-to-peer (P2P) financing. Online lending markets like LendingClub.com and Prosper.com allow you to borrow small amounts (generally less than $25,000) from other people. However, rates on these sites are typically higher than what a bank or the SBA could offer you.

Microloans. Microloans are for smaller amounts that traditional business loans (usually less than $50,000) and have shorter durations (under six years). Check with the SBA or a microlending specialist to investigate your options.



Method 2 Financing the Purchase With Your Own Assets.



1. Use your own savings. The easiest and cheapest way to finance your own business is with your own personal savings. This includes any savings accounts, CDs, investment accounts, or other liquid accounts you hold. By using the money from these accounts to finance your personal, you can avoid having to work with partners, investors, or lenders when running your business. However, it is rare that an individual has enough money in these accounts to purchase a business.



2. Sell any valuable assets you currently own. Another way to raise money is to sell off valuable assets that you own. Parcels of land, non-essential vehicles, and boats can all be sold to raise this type of money.



3. Borrow against your home equity. You can borrow against the value of your home using a second mortgage or a home equity line of credit (HELOC). However, this requires having enough equity in your home in the first place. More importantly, it also introduces the risk that, in the event of the business's default, your house may be foreclosed upon by the lender. Consider the risks and try every other options available to you before pursuing this type of financing.



4. Avoid purchasing the business with your retirement savings. While it is possible to roll your IRA or 401(k) savings balances into a business venture without taking a tax hit, doing so is incredibly risky. If your business fails to perform as expected, you could lose all of the money you have saved for retirement. Personal finance experts recommend against using this as a method of business financing.



Method 3 Bringing On Investors or Partners.



1. Consider finding a partner or several of them. A partner is someone who provides some initial purchase money for the business in exchange for an ownership share. Your partner will likely want to be involved in the business in some way, so make sure to only take on a partner that you can work well with. And being personally close with someone doesn't make them a good partner; sometimes a trusted or knowledgable co-worker or acquaintance can make a better partner than a friend or family member.

In addition, make sure to draw up a legal contract that clarifies the terms of the partnership. This agreement should list how disputes are settled, how major decisions are made, and exactly how profits are divided.



2. Work with a silent partner. A silent partner is one that contributes capital to the business, but has no say in its operations. However, many silent partners eventually want to have a say in how the business is run. Again, to ensure that this relationship works as planned, draw up a partnership agreement that specifies the terms of your partnership in detail.



3. Bring on angel investors. An angel investor is a wealthy private investor who gives start-up capital to new businesses and new business owners in exchange for equity in that business. Businesses with angel investors benefits from the angel investor's industry expertise, business contacts, and financial resources. Locating angel investors, however, can be difficult. You'll have to locate a high net worth individual who shares your passion for the business you are buying and its industry. Then, you'll have to convince them of your own management skill and your ability to give them a good return on their money.

Angel Investors can be located by visiting the Angel Capital Association's website.



4. Engage in equity crowdfunding. Equity crowdfunding, which involves selling small stakes in your business to a large number of small investors, is a relative newcomer in the world of business financing. While equity crowdfunding has been around for years, operating through sites like SeedInvest, it has recently become tightly regulated by the Securities and Exchange Commission (SEC). Equity crowdfunding can be an effective way to raise money, but only with the proper guidance, as following SEC guidelines can be complicated.



Method 4 Getting Seller Financing.



1. Consider the benefits and drawbacks of seller financing. Seller financing, also called owner financing, is a purchase arrangement in which you repay the sale price of the business directly to its previous owner over several years. For the buyer, this provides some flexibility in repaying the loan, such as negotiating a longer repayment period, a temporary reprieve from payments, or reducing the price in exchange for letting the owner keep some equity in the business. However, this type of arrangement is typically more expensive, with the owner charging a higher interest rate than the bank would charge.

Ideally, the buyer should negotiate an arrangement where all or a portion of the loan financed by the seller may be contingent upon the profits reached and payable over a limited term. This protects the buyer in case profits are not as high as expected.

Obtaining seller financing may give you more power in negotiating down the price of the business.

Doing so also gives the seller reason to help you out more in running and managing the business.



2. Ask the seller if they would consider seller financing. Start by asking the seller directly if they would consider seller financing. It may help if you explain to them that this will result in their getting more money over time, as they get to keep the interest on your loan (rather than the bank keeping it). If they agree, you can begin negotiating a contract.

If possible, avoid securing the seller with assets purchased. This gives you a cushion if additional financing is needed to get the business is running smoothly.



3. Negotiate a contract. Work with the seller to form the terms of sale. Start by offering to make a down payment with what you can gather on your own, say 10 to 20 percent of the sale price. Try to offer as large of a down payment as you can afford; this will only help you and save you money in the long run. Then discuss a repayment period and interest rate. Try to negotiate a longer repayment period and lower interest rate to make sure that you can afford the payments.

You may be able to agree on a large, balloon payment in a number of years. This will reduce your monthly payments. Then, you can get a bank loan or use your savings to cover the balloon payment.

Alternately, where a C corporation is involved in the purchase, issuing preferred stock may be a better option than debt for the buyer when repaying the balloon payment.



4. Have a lawyer review the contract. Ideally, you should have an attorney that specializes in business contracts draw up the contract. However, you can also have one review the contract to ensure that your interests are represented and that there are no surprises waiting for you in the wording of the contract. You may also want to have an accountant review the financials of the deal to make sure everything checks out.

The lawyer, and possibly an accountant, should confirm the validity of the financial statements, specifically the identity, value and location of assets and liabilities.



5. Finalize the deal. Once you've been assured that the contract is right for both you and the seller, close the deal and take control of the business. With seller financing, you'll likely be able to convince the previous owner to help you out with getting started as the manager of your new business.

November 22, 2019

How to Discuss Finances Together in a Marriage

How to Discuss Finances Together in a Marriage.

Finances are a hot topic when it comes to all relationships, especially marriages. Saying “I do” means more than just sharing a life together, it also means sharing financial responsibility for that life. Whether good or bad, each spouse needs to be open and honest about his or her current financial standing. What’s more, the couple must work together to decide on important financial decisions for the future. Learn the basics for discussing money with your spouse.



Part 1 Communicating Effectively

1. Broach the subject casually with your spouse. The time to start talking about merging your finances is before the wedding, but at least 40% of couples avoid doing so.

Start the conversation with your action items first. This could mean starting off by talking to your spouse about your desire to look at your own credit score as you prepare to buy a house and suggest that he or she does the same. Say something like “Have you checked your credit report lately? I’ve been wanting to get a good picture of my financial standing. Maybe we can do it together?”

Things like credit scores for both of you may change how you approach buying a home, for example. You may find if one of you has a higher score than the other, it may be better to buy without both of you on the mortgage. However, things line up, remember you are on the same “team”.

2. Gather data to support your decisions. Print your credit reports and any supporting documentation, such as account balances and credit card debt. Financial choices need to be based on numbers not emotion. Make sure you both have a clear idea of what debts came into the union and how you can work to pay those down.

Early on you are doing this to get on the same page about your individual financial pictures. However, in the future, it may be nice to take time each month to sit down together and look over the numbers. Viewing credit card statements and account balances can be a way to keep you accountable as far as goals and also open the floor for an ongoing discussion with your spouse.

3. Be candid about any bad habits. Before you get started, you must be forthright with your spouse about any habits you happen to have that are not apparent on your credit reports.

An example of a bad habit would include not taking the time to write down purchases made on your debit card so you can balance your check book. When you were single, this may have not seemed like a huge deal, but with two people sharing accounts it can quickly become a problem.

Other bad habits you need to bring to your spouse would include past blemishes on your credit like having too many credit cards open, being in default on student loans or having bills in collection. All of these issues can impact credit, but they can also be addressed and resolved.

4. Refrain from pointing the finger. Placing blame and arguing over money will not make any issues better. If you ask your spouse to be honest about credit challenges and then start the blame game you will probably not get that same level of honesty in the future.

5. Listen to understand, not to reply. This means looking at your spouse as he or she is speaking, listening carefully to fully get his or her point of view, and then taking that one step further by confirming what you have heard.

When you sit down to have a tough conversation with your spouse, you will break the trust if you are not willing to listen. Don’t ask the tough questions unless you are ready to handle any answer.

The exchange of information should be fair and equal.



Part 2 Setting Ground Rules.

1. Decide if you will merge all the money or maintain separate accounts. Even after getting married there are no laws that say you have to merge all your accounts. Having separate accounts does not mean neither of you knows what the other is doing. Both partners should have access to the records of the other since you are sharing a household.

Depending on the credit scores for both spouses, it may make more sense to keep separate accounts especially if you want to buy a home soon. One spouse alone on a mortgage is going to have a higher chance of getting the loan than two people with mixed credit scores.

2. Determine who will be the primary overseer of your money. This will include how you make decisions about both small and large purchases. The person who is most organized and financially savvy may be the best choice for managing the finances. However, both partners should take on the responsibility in some way. So, choose duties according to your individual strengths.

For example, one of you may be better at saving, so you will be in charge of building an emergency fund and overseeing retirement savings. The other may be in charge of paying monthly bills and balancing the checkbook. Decide based on what’s best for you and your spouse.

3. Agree about which of you will handle certain expenses. You will need to know who is writing the check for rent, paying the electric bill and other household bills. You do not want to get into a situation where both of you thought the other paid the electric bill and you learn that it wasn’t paid when the lights are turned off. You also don’t want to pay bills twice and be short money.

Being upfront about how much both of you make and how you will divide the bills will make things much easier. Some families divide everything I half while others just pool their money regardless of who makes what.

The use of credit cards versus cash should also be explored as one partner may be used to always using a card and then paying it off once a month while the other only uses cash. This needs to be talked about.

4. Don’t make big purchases without your spouse’s blessing. Regardless of who makes more money, a big ticket item should be bought together. This is a good time to set boundaries about how much either of you can spend without talking to your spouse. This can be as simple as saying you have a spending limit of $100 without checking in since that is a low amount in your budget and won’t overdraw the account.



Part 3 Overcoming Money Troubles.

1. Build a household budget. This budget should include all the household bills, ongoing needs and bills that were outstanding from before you got married. The budget needs to be realistic and something you both commit to. Consider these tips:

Tally up every single monthly expense and plan for them in advance.

Include separate and joint goals.

Include long-term goals like saving for a down payment on a house.

Negotiate with ongoing bills to cut down interest rates or get rid of fees.

Automate whatever you can so that you don’t miss paying bills and acquire late fees.

Go back and revise your budget as needed.

2. Start building an emergency fund. If you didn’t already have an emergency fund before getting married, now is the time to build one. An emergency fund acts as a cushion in times when unexpected expenses pop up or one of you is out of work.

How big your emergency account is will depend on you and your spouse. Many families tuck away enough money for at least 3 to 6 months of expenses. This provides greater security over the long haul.

This savings account would be for true emergencies only, not impulse buys. Take the time to set boundaries as to what qualifies as an emergency.

Some households use a credit card for emergencies like car repairs. Make sure you both agree if this is a good use of your credit cards and leave the available balance for such an emergency. If either of you has problems with managing credit cards, this may not be the best option for your household.

3. Know your debt situation and decide on a strategy to pay it off.[13] Both of you should have a very clear idea of the other person’s debt as well as your own. Don’t fall prey to the idea that it’s your spouse’s problem—it’s not. Both of your debt is usually considered during major purchases, so working together to shrink each person’s debt is ideal.

It can also be helpful to get financial advising or attend a debt reduction course for couples. If you have a significant amount of debt—or have no idea where to start to pay it down—it may be practical to involve a professional who can assist you.

4. Plan for your retirements. Talk to your spouse and come up with a plan that suits both of you for retirement and start saving. Keep in mind, that men and women often have varying opinions when it comes to retirement, so be willing to compromise and consider your spouse’s perspective.

Include payments to 401K and other investments as a part of your budget. Part of this process also includes changing the beneficiaries for each account now that you are married.

If you don’t already, you also need to draw up life insurance policies to secure your spouse and your family in case of a tragedy.



Question : If we get a divorce, will my wife get 50% of my 401K too?

Answer : Honestly, this depends on the state and the county where you are getting divorced. Different locations have different rules of division in a divorce. Some states are equitable division, meaning you split 50/50 while others are not.



Warnings.

Money troubles have ended more than a few marriages. If you are both responsible, open and honest about money, it will make for a stronger marriage.

Be mindful that some people are sensitive about discussing money. To some, money means power and control and these are very volatile subjects. Handle with care.

It can be a difficult and uncomfortable transition going from being a single person in total control of your finances to being part of a couple. If your partner is resistant, give him or her time. If you can show them that you are interested in working as a team with no judgments, your spouse will eventually come around.

February 10, 2020

how to discuss finances together in a marriage

How to Discuss Finances Together in a Marriage.

Finances are a hot topic when it comes to all relationships, especially marriages. Saying “I do” means more than just sharing a life together, it also means sharing financial responsibility for that life. Whether good or bad, each spouse needs to be open and honest about his or her current financial standing. What’s more, the couple must work together to decide on important financial decisions for the future. Learn the basics for discussing money with your spouse.



Part 1 Communicating Effectively

1. Broach the subject casually with your spouse. The time to start talking about merging your finances is before the wedding, but at least 40% of couples avoid doing so.

Start the conversation with your action items first. This could mean starting off by talking to your spouse about your desire to look at your own credit score as you prepare to buy a house and suggest that he or she does the same. Say something like “Have you checked your credit report lately? I’ve been wanting to get a good picture of my financial standing. Maybe we can do it together?”

Things like credit scores for both of you may change how you approach buying a home, for example. You may find if one of you has a higher score than the other, it may be better to buy without both of you on the mortgage. However, things line up, remember you are on the same “team”.

2. Gather data to support your decisions. Print your credit reports and any supporting documentation, such as account balances and credit card debt. Financial choices need to be based on numbers not emotion. Make sure you both have a clear idea of what debts came into the union and how you can work to pay those down.

Early on you are doing this to get on the same page about your individual financial pictures. However, in the future, it may be nice to take time each month to sit down together and look over the numbers. Viewing credit card statements and account balances can be a way to keep you accountable as far as goals and also open the floor for an ongoing discussion with your spouse.

3. Be candid about any bad habits. Before you get started, you must be forthright with your spouse about any habits you happen to have that are not apparent on your credit reports.

An example of a bad habit would include not taking the time to write down purchases made on your debit card so you can balance your check book. When you were single, this may have not seemed like a huge deal, but with two people sharing accounts it can quickly become a problem.

Other bad habits you need to bring to your spouse would include past blemishes on your credit like having too many credit cards open, being in default on student loans or having bills in collection. All of these issues can impact credit, but they can also be addressed and resolved.

4. Refrain from pointing the finger. Placing blame and arguing over money will not make any issues better. If you ask your spouse to be honest about credit challenges and then start the blame game you will probably not get that same level of honesty in the future.

5. Listen to understand, not to reply. This means looking at your spouse as he or she is speaking, listening carefully to fully get his or her point of view, and then taking that one step further by confirming what you have heard.

When you sit down to have a tough conversation with your spouse, you will break the trust if you are not willing to listen. Don’t ask the tough questions unless you are ready to handle any answer.

The exchange of information should be fair and equal.



Part 2 Setting Ground Rules.

1. Decide if you will merge all the money or maintain separate accounts. Even after getting married there are no laws that say you have to merge all your accounts. Having separate accounts does not mean neither of you knows what the other is doing. Both partners should have access to the records of the other since you are sharing a household.

Depending on the credit scores for both spouses, it may make more sense to keep separate accounts especially if you want to buy a home soon. One spouse alone on a mortgage is going to have a higher chance of getting the loan than two people with mixed credit scores.

2. Determine who will be the primary overseer of your money. This will include how you make decisions about both small and large purchases. The person who is most organized and financially savvy may be the best choice for managing the finances. However, both partners should take on the responsibility in some way. So, choose duties according to your individual strengths.

For example, one of you may be better at saving, so you will be in charge of building an emergency fund and overseeing retirement savings. The other may be in charge of paying monthly bills and balancing the checkbook. Decide based on what’s best for you and your spouse.

3. Agree about which of you will handle certain expenses. You will need to know who is writing the check for rent, paying the electric bill and other household bills. You do not want to get into a situation where both of you thought the other paid the electric bill and you learn that it wasn’t paid when the lights are turned off. You also don’t want to pay bills twice and be short money.

Being upfront about how much both of you make and how you will divide the bills will make things much easier. Some families divide everything I half while others just pool their money regardless of who makes what.

The use of credit cards versus cash should also be explored as one partner may be used to always using a card and then paying it off once a month while the other only uses cash. This needs to be talked about.

4. Don’t make big purchases without your spouse’s blessing. Regardless of who makes more money, a big ticket item should be bought together. This is a good time to set boundaries about how much either of you can spend without talking to your spouse. This can be as simple as saying you have a spending limit of $100 without checking in since that is a low amount in your budget and won’t overdraw the account.



Part 3 Overcoming Money Troubles.

1. Build a household budget. This budget should include all the household bills, ongoing needs and bills that were outstanding from before you got married. The budget needs to be realistic and something you both commit to. Consider these tips:

Tally up every single monthly expense and plan for them in advance.

Include separate and joint goals.

Include long-term goals like saving for a down payment on a house.

Negotiate with ongoing bills to cut down interest rates or get rid of fees.

Automate whatever you can so that you don’t miss paying bills and acquire late fees.

Go back and revise your budget as needed.

2. Start building an emergency fund. If you didn’t already have an emergency fund before getting married, now is the time to build one. An emergency fund acts as a cushion in times when unexpected expenses pop up or one of you is out of work.

How big your emergency account is will depend on you and your spouse. Many families tuck away enough money for at least 3 to 6 months of expenses. This provides greater security over the long haul.

This savings account would be for true emergencies only, not impulse buys. Take the time to set boundaries as to what qualifies as an emergency.

Some households use a credit card for emergencies like car repairs. Make sure you both agree if this is a good use of your credit cards and leave the available balance for such an emergency. If either of you has problems with managing credit cards, this may not be the best option for your household.

3. Know your debt situation and decide on a strategy to pay it off.[13] Both of you should have a very clear idea of the other person’s debt as well as your own. Don’t fall prey to the idea that it’s your spouse’s problem—it’s not. Both of your debt is usually considered during major purchases, so working together to shrink each person’s debt is ideal.

It can also be helpful to get financial advising or attend a debt reduction course for couples. If you have a significant amount of debt—or have no idea where to start to pay it down—it may be practical to involve a professional who can assist you.

4. Plan for your retirements. Talk to your spouse and come up with a plan that suits both of you for retirement and start saving. Keep in mind, that men and women often have varying opinions when it comes to retirement, so be willing to compromise and consider your spouse’s perspective.

Include payments to 401K and other investments as a part of your budget. Part of this process also includes changing the beneficiaries for each account now that you are married.

If you don’t already, you also need to draw up life insurance policies to secure your spouse and your family in case of a tragedy.



Question : If we get a divorce, will my wife get 50% of my 401K too?

Answer : Honestly, this depends on the state and the county where you are getting divorced. Different locations have different rules of division in a divorce. Some states are equitable division, meaning you split 50/50 while others are not.



Warnings.

Money troubles have ended more than a few marriages. If you are both responsible, open and honest about money, it will make for a stronger marriage.

Be mindful that some people are sensitive about discussing money. To some, money means power and control and these are very volatile subjects. Handle with care.

It can be a difficult and uncomfortable transition going from being a single person in total control of your finances to being part of a couple. If your partner is resistant, give him or her time. If you can show them that you are interested in working as a team with no judgments, your spouse will eventually come around.

February 10, 2020