How Does Owner Financing Work

Q: We are currently renting, and have been for the past ten years. We would like to buy a home, but have not been able to save up enough for a down payment. We have average credit, but can’t seem to get approved for any home loan. We are wondering about owner financing as an option to help us get into a home of our own? How does owner financing work?

A: In today’s current market, without great credit and some money down, finding a home loan can be very difficult. There are actually many ways to answer the question of “how does owner financing work”, because there are many different ways to negotiate an owner financed transaction. With owner financing the terms are completely negotiable, however it’s not necessarily a “simple” alternative for those who can not secure a home loan from a traditional lender.

To best answer the question: How does owner financing work? It is first important to understand what owner financing means. In real estate terms “owner financing” is when a portion or all of the home’s purchase price (minus the buyer’s down payment) is carried by the seller of the home. Instead of getting a home loan from a bank, the buyer and seller of the home (essentially) reach a financing agreement, and the buyer then makes payments to the seller of the home (instead of a bank). Owner financing is probably most likely to occur when the seller owns the house free and clear (because if the home has an existing loan, the existing lender can accelerate the loan upon sale). Finding a seller that owns the home free and clear will be the first hurdle buyers will have to face with owner financing.

Even though answering the question of how does owner financing work can be different depending on the terms negotiated, virtually all owner financed agreements will require a large down payment and carry a higher interest rate (compared to traditional lender). The plus side to owner financing is there is typically no credit check. The buyers down payment is generally used as the credit check, meaning if the buyer defaults on the loan, the seller will keep the down payment, foreclose on you (kick you out), and put the house back on the market. Owner Financing is certainly an option or alternative for those who cannot qualify for a home loan through a traditional lender, however buyers should be prepared to have and put down at least 5-10% of the cost of the home.