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Owner Financing
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Owner Financing

A home loan provided to a home buyer by the seller of the property.

More On Owner Financing

Definition

Owner financing is when a home loan is provided to a home buyer by the seller of the property. This is considerably less regulated than residential mortgage lending. Experts often recommend that buyers consult a real estate attorney before obligating themselves to an owner-financed home purchase or lease option.

Owner Financing Explained

Typically when someone buys a home, they make a down payment and borrow the rest of the money needed for the purchase, in the form of a mortgage.  Owner financing, on the other hand, is when the seller of a home finances, or helps to finance, the purchase of the home by the buyer.

Owner financing is especially appealing for people who have low credit scores or low down payments.  Usually mortgage lenders and banks give the best interest rates to the people with the highest credit scores because a high credit score is an indicator of creditworthiness.  Also, mortgage lenders will often establish a minimum down payment and if it can’t be met, the deal cannot be completed.  These issues are usually not presented when dealing with owner financing, so someone who might not be able to get a mortgage from a traditional lender might have some success if the seller of the home helps finance the purchase.

On the other hand, there is a negative side to owner financing.  One issue is that people on the buying end might encounter is balloon payments.  The seller might structure the repayment of the loan so that for a set time period, the buyer pays interest only.  Then after that time period is over, the buyer is expected to make one large final payment of the whole principal.  This might not be a big deal if the buyer will have the cash in a few years, but it can be quite risky if the buyer’s financial situation doesn’t change.