Should You Consider Owner Financing?

Owner financing becomes more popular during a slow market, but be sure to do your research first to see if the arrangement is right for you.

Owner financing isn’t for everyone, but can offer a number of benefitsfor both the home seller and buyer, especially in a slow market. Using an owner financing arrangement is not without its legal and financial issues, however.

What is owner financing?

Owner financing, also called seller financing, is when a home seller essentially assumes the role of a financial lender. As with any traditional financing of a sale, the seller and buyer agree on a purchase price of the home, sign a promissory note and record the mortgage.

With owner financing, however, it is the seller of the home who is extending credit to the buyer. The buyer provides the seller with a down payment and then pays back the loan, usually with interest, to the seller over a period of time. At the end of this agreed-upon timeframe, typically five years or less, the buyer then refinances with a traditional lender, paying the seller the balance due.

How is owner financing structured?

There are several ways to structure an owner-financing arrangement.

• All-inclusive mortgage or deed of trust. With this type of financing, the seller carries the mortgage note for the purchase price, less any down payment.
• A junior mortgage falls into this category as well, but differs in that the buyer uses a traditional lender for the bulk of the loan and then the seller provides financing for the remainder, called the second or “junior” mortgage. (However, this arrangement brings greater risk to the seller, who becomes secondary to the bank in collecting should the borrower default.) For tips on how to reduce your risk as a seller, click here.
• Land contract. This type of owner-financing arrangement shows the buyer’s intent to purchase the property. A signed contract is in place between both parties, but the title of the home remains in the owner’s name until final payment has been made by the buyer, or the buyer refinances to a traditional mortgage.
• Lease/purchase option. With this owner-financing arrangement, the seller and buyer agree upon a purchase price of the home. The seller then leases the property to the buyer for a set period of time, during which the buyer makes regular rent payments to the seller. At the end of the lease, the buyer takes out a traditional mortgage to pay the purchase price less the total of rent payments already made.

What kind of professional assistance will you need?

If you’re considering an owner-financing arrangement as either the seller or buyer don’t go it alone. Be sure to get professional help—an attorney, real estate agent, title insurance company or other qualified, knowledgeable professional—to write up the promissory note and contract, to help you record the transaction, and to provide advice.

If owner financing isn’t the right option for you, there are other creative strategies you can try to sell your home.

This article contains general information. Individual situations are unique; please, consult your financial advisor or attorney before utilizing any of the information contained in this article.

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