What is Owner Financing?

What is Owner Financing?

Owner finance arrangements are contracts between buyers and sellers that operate like mortgages but without a third-party lender. Essentially, the seller becomes the lender and earns interest on the borrowed principal, and the buyer enjoys homeownership and builds equity.

These types of agreements were used frequently after the 2008 Great Recession. During that time, lenders all but stopped approving mortgages. As a result, buyers needed alternative ways to pay off their property purchases.

While owner financing is one name for this type of agreement, you may also hear it referred to as seller financing, holding mortgages or purchase money mortgages.

How Does Owner Financing Work?

Owner financing can be helpful to a range of buyers and sellers. Parts of the process may be familiar to anyone with experience in traditional lending, but it has its differences. Sellers and buyers should know how owner financing works for each party.

For Sellers

Foremost, always make sure that the seller you work with owns the property free and clear. Otherwise, if the seller tries to transfer the deed without their lender’s permission, they will violate the alienation clause. That could lead to property foreclosure.

In owner financing, the seller takes up a position similar to a lender. They extend a certain amount of credit that allows the buyer to afford the property’s purchase price. Once they do, the buyer has to pay them back. The seller earns a regular monthly income of principal and interest from this. And, just like a traditional lender, they must keep records of any transactions.

For Buyers

Owner financing is like traditional lending but gives buyers flexibility. They make monthly payments of principal and interest to the seller, rather than a typical lender like a bank. So, the buyer still enjoys homeownership and can build up equity. It also gives them the opportunity to fix their credit or make repairs to the house without worrying about applying for a mortgage.