Owner financing, commonly called seller financing, is a loan provided by the seller to the purchaser. In many cases, the purchaser will make a down payment and then make installment payments – usually on a monthly basis, just as he or she would with a traditional mortgage – until the loan is paid off.
Generally, this is the type of transaction in which the seller offers the loan rather than forcing the buyer to go through the bank approval process.
Who Benefits from Owner Financing?
Naturally, a buyer with less than perfect credit can benefit from owner financing; because banks have become more stringent in their lending requirements, it can be difficult for some people to obtain traditional financing.
The seller also benefits, because he or she is able to sell the home without waiting for a traditional lender to approve the buyer.
Some of the benefits for both parties include:
- Negotiable interest rates
- Negotiable repayment schedules
- Savings on closing costs
- No private mortgage insurance is required (unless the seller requires it)
- The property can be sold “as is” so no repairs are necessary
What Happens if the Buyer Doesn’t Pay?
In most owner financing cases, when the buyer defaults (fails to make a monthly payment), the seller repossesses the property. It’s similar to a foreclosure, but between the two parties rather than a traditional lender and the homeowner.
Is Owner Financing Legal?
Owner financing is perfectly legal. Typically, the owner will draw up a purchase agreement with an attorney’s assistance, and both parties will sign it.
Sometimes these loans can be for shorter periods than a traditional 30-year mortgage. For example, the seller can charge a monthly fee with a balloon payment after 5 years that pays off the loan. In some cases, the buyer can then obtain traditional financing to make the balloon payment.