What is Owner Financing?

Photo by NeONBRAND on Unsplash

Updated on October 23rd, 2019. 

Real estate transactions traditionally consist of a seller finding a suitable buyer with the required finances from a lender. The puts up the money to complete the sale and the seller hopefully makes some profit. In the end, the house is sold with a mortgage placed by the lender for the buyer to pay back over time.

However, what if a traditional real estate transaction wasn't possible, but both parties still would like to make the deal happen? For example, the buyer has bad credit or no credit, or maybe the buyer has a great credit score with a substantial down payment in the bank but recently opened a new business, so getting a loan is tough for a couple years, so can both parties still complete the transaction on the house? Yes, they sure can by what's known as owner financing or seller financing. Our team at Properters have structured a number of deals with owner financing in recent months, but what exactly does it mean?

Defining Owner Financing

As the term suggests, the owner or the individual selling the house will act as the lender for the buyer, financing the deal and skipping the need for the buyer to acquire a mortgage. Owner financing enables both parties to conduct business privately, without the need for agents and financial institutions, but that doesn't mean either party can forget about their due diligence. 

How Owner Financing Works

Terms and payments will still need to be arranged and held under contractual agreements between both parties. Generally, the owner agrees to sell the house to the buyer by accepting multiple payments over time for the purchase price of the house. For example, if the owner agreed to sell their house for $150,000 with the seller paying $6,250 per month for the next 2 years, it would be considered owner financing.

The details of the terms, which includes the purchase price and schedule of payments can all vary depending on the circumstances of each transaction. It's important to note that the owner must have 100% equity in the house they are selling before they discuss any owner financing options with buyers. Also, the owner typically holds onto the title of the house until all payments have been completed by the buyer for protection in case the buyer doesn't follow through with the agreement.