How Does Owner Financing Work?
Finding a cooperative seller is key to obtaining owner financing for a purchase. Also known as seller financing or a seller carry-back loan, this unconventional form of financing can benefit both buyer and seller. Speak to a real estate attorney to ensure all loan terms and conditions are spelled out in your contract. Also, be sure you can afford the owner financing payments. Defaulting can lead to foreclosure, as with an institutional lender.
Reasons for Owner Financing
- You may need a seller's help to purchase a home when insufficient credit, income, funds or another aspect of your financial situation prevents you from getting a traditional mortgage or reasonable loan terms. A seller may agree to finance a buyer if a low appraised value or market conditions prevent the seller from obtaining a desired price. Sellers can finance a buyer who has obtained a traditional mortgage, supplementing it with a second loan for the down payment amount or more. Sellers can also finance the entire purchase price. They might choose to if they own the home free and clear of a mortgage and their financial circumstances permit.
Securing Repayment
- An owner-financing contract typically stipulates that the loan must be repaid within a specified number of years. It may require a large payoff at the end of the repayment term, known as a balloon payment, plus monthly mortgage payments with interest. Like traditional mortgage lending, owner financing involves a promissory note, which is a legally binding IOU that spells out the repayment terms. The home acts as collateral, securing loan repayment. Depending on the state, the document, or security instrument, used is called a mortgage or a deed of trust.
When the home is subject to a first mortgage held by an institutional lender, the owner financed loan takes a subordinate position, meaning it has less priority for repayment than the traditional mortgage.
