Grant Trevithick - Dallas Real Estate Investor explains Owner Finance

If you’re in the market for a new home but are having trouble winning loan preapproval, owner financing is an alternative that can keep your dream of homeownership within reach. Though not all sellers will be willing—or able—to provide direct financing to the buyer, it can be an excellent way to buy a property while also simplifying the closing process.

That said, owner-financed homes can be complex and necessitate a written agreement—so it’s important to understand the process before signing on the dotted line. We’ll walk you through how owner financing works, how it can help you as a buyer or seller and how to structure an owner-financed deal.

What Is Owner Financing?

Owner financing—also known as seller financing—lets buyers pay for a new home without relying on a traditional mortgage. Instead, the homeowner (seller) finances the purchase, often at an interest rate higher than current mortgage rates and with a balloon payment due after at least five years.

This can simplify the process of buying and selling a home by eliminating the need for a lender, appraisal and inspection.

How Owner Financing Works

Just like a conventional mortgage, owner financing involves making a down payment on property and paying off the rest over time. That said, this alternative to traditional financing is typically more expensive and requires repayment or refinancing into a traditional loan in as little as five years. Still, seller financing is usually faster and easier to get than a government-backed mortgage—if the seller is willing and able to provide it.

And, while most owner financing requires some form of background or credit check, it can help otherwise unqualified borrowers achieve homeownership. Not only are there no banks or traditional lenders involved, owner financing doesn’t necessitate an inspection or appraisal unless the buyer wants them.

Once a buyer and seller agree to terms, monthly payments are made to the owner-seller according to an agreed-upon amortization schedule. Depending on that schedule, the borrower also may face a large lump-sum payment at the end of the loan term. Unlike traditional mortgages, however, tax and insurance payments generally are not rolled into monthly debt service, and the buyer must make them directly.

At the end of the loan term, the buyer either makes the balloon payment or obtains a mortgage refinance and pays off the sellers with the proceeds of a new loan. Depending on how the owner financing was originally structured, the buyer will get title to the property for the first time or the seller will execute a Satisfaction of Mortgage indicating the mortgage has been paid in full and releasing the lien on the property.

Owner Financing Example

Say, for example, a homebuyer wants to purchase a historic home that doesn’t qualify for a conventional mortgage due to its age and condition. The borrower offers to purchase the home for $80,000 with a $25,000 down payment—just over 30% of the purchase price.

The seller agrees to finance the remaining $55,000 at an interest rate of 7% for a five-year term and amortized over 20 years—resulting in a balloon payment of about $47,000 due at the end of five years. Over the course of the loan, the buyer makes monthly payments of $426 and is responsible for property tax and insurance payments.

At closing, the buyer receives title to the home that is subject to a mortgage held by the seller. After five years of on-time monthly payments, the buyer makes the final balloon payment and the mortgage lien is released.