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Owner financing: A win-win deal for both buyer and seller

Posted on: 14th Apr, 2004 05:33 pm
Even a decade ago, it was not much difficult to obtain a mortgage as it is now. Home prices were high and lenders had abundant cash at their disposal, making mortgage loans easily obtainable. Even stated income loans and no-doc mortgages were available. The housing market crash of 2007-08 has however reversed the situation and brought about some belt-tightening measures in the market. Currently, the stated income loans or no-doc mortgages have disappeared from the market and the criteria to obtain a mortgage loan have become more stringent. These market realities have forced the home buyers and sellers to become more creative. One of the creative strategies adopted by them is the owner financing.

What is meant by owner financing?

Owner financing takes place when a property buyer finances the purchase directly through the person or entity selling it. This takes place when a potential buyer can't obtain the necessary funds through the third-party lenders. Owner financing may also take place in case the home buyer is unwilling to pay the prevailing market rate of interest. Again, in case the seller finds difficulty in selling the house, then the seller also may be interested to opt for owner financing.

In owner financing, usually the purchase price of the house is partially financed by the home seller and the rest of the amount is financed by taking out a smaller loan. Owner financing is also called as 'seller financing' or 'creative financing'.


Owner financing is common in a buyer's market – a market which has more sellers than buyers. To safeguard his/her interest, the home seller may ask for a high down payment of 20% or more. Here however the deed of the property is not transferred to the buyer unless all the payments are made in full. Since no institutional lenders are involved here, the terms and conditions of the mortgage are negotiable. In fact, terms and conditions are set up in such a way so as to provide benefits to both the buyer and the seller.

What are the different types of owner financing?

In owner financing, sellers and buyers negotiate on the terms and conditions of the transaction, subject to the regulations in the particular state. There is no fixed percentage of down payment that the buyer has to pay to the seller. Down payment percentage may vary from a very low level to as much high as 30% or above. Higher down payment protects the home sellers from the risks of default by the home buyers. Owner financing can be done in the following ways-

  • Land contract
  • In land contract, legal title of the home is not transferred to the home buyer but the buyer is given an equitable title, a title that fetches temporarily shared ownership. Payments are made by the buyer to the seller and the buyer becomes the owner of the property once the final payment is made.

  • All-inclusive mortgage
  • In this type of owner financing, the home seller is responsible for carrying a mortgage promissory note that is equal to the difference between the home price and the down payment amount.

  • Junior mortgage
  • In the current market conditions, many lenders are not willing to offer finance more than 80% of the value of a home. Home sellers may come into the scene and can make up for the difference. The home seller can take out a junior mortgage to compensate for the deficient amount of the home buyer. Here the seller can take out the junior mortgage from the first mortgage taken out by the buyer from the first mortgage lender. However, taking out a junior mortgage loan is comparatively risky as in the event of default by the home buyer, the first mortgage is repaid first and the junior mortgage is paid off later.

  • Lease agreement
  • Another form of owner financing is the lease agreement where the home seller gives equitable title to the buyer and leases the home for a contracted term such as an ordinary rental. Once the agreement is over, the buyer has to take out a mortgage loan equal to the purchase price of the home minus the total rent payments made.

What are the different benefits of owner financing?


Owner financing offers several benefits to both the buyers and the sellers. Most of the times, this type of home purchase is a win-win situation for both the parties.

Benefits to the home buyers

Despite the high down payment that the buyer has to make, owner financing offers several benefits to them -

  1. Easy qualification criteria
  2. Because of the relatively easy qualification criteria, many home buyers prefer owner financing over traditional financing. Due to recent bankruptcy or divorce, the home buyer may have poor credit, making him/her ineligible for a traditional home financing. Again, the home buyer may be a self-employed person and may not have the necessary documents in support of his/her income. The home buyer may also be very new in the job market and may not fulfill the criteria required to obtain a traditional loan. In addition to these, there are many other reasons which make a home buyer not eligible to obtain traditional financing. Owner financing is certainly a very good choice for these home buyers.

  3. Tailor-made financing
  4. Unlike the traditional financing, here both the buyers and the sellers have the flexibility of choosing from a variety of payment options such as fixed-rate amortization, interest-only or a balloon payment. Home buyers can decide the payment option by negotiating with the sellers.

  5. No/low closing costs
  6. In case of owner financing, home buyers aren't required to pay the closing costs which the home buyers have to pay compulsorily in case of conventional financing. Loan origination fees, processing fees, points, title insurance, underwriting fees, administration fees and many other fees charged by the traditional lenders add up to thousands of dollars. By opting for owner financing, home buyers can avoid these costs.

  7. Faster closing
  8. Here the buyer and the seller are not dependent on a lender to process the loan. Absence of any third party lender, ensures faster closing of the transaction.

Benefits to the home sellers

Sellers aim at obtaining as much price as possible. Sellers also want to enjoy tax saving benefits on the gains accrued. Benefits to the sellers are listed below -

  1. Highest price
  2. Since the seller is offering the financing at soft terms, the seller may want to receive more than the fair market value of the property. Buyers may also be agree to pay the premium as they can't qualify for traditional financing.

  3. Tax saving benefits
  4. In case of owner financing, home seller sells the property in installments. Home seller reports only the income received in each calendar year. This means that here the sellers have to pay less tax.

  5. Monthly cash flow
  6. The monthly payments that the home seller receives from a buyer, increases his/her monthly cash flow. This in turn raises the spending capacity of the seller.

  7. Selling a hard-to-sell property
  8. It may be the case that the seller is finding it tough to sell the property through the conventional route. Through owner financing, a home seller can sell an otherwise hard-to-sell property with lot ease.

Before agreeing to owner financing, both parties should consult separate legal counsel in their state.
Related Readings

Related Forum Discussions

Is it customary to get a down payment also, with the owner financing?
Posted on: 25th Jan, 2010 07:59 am
down payment cannot be provided by a seller.
Posted on: 25th Jan, 2010 08:04 am
If I am buying a $400,000 home with 100% owner financing and want to get a traditional mortgage after a few years, would I be able, with most lenders, to get an 80% mortgage loan if the seller continues to finance the other 20%? In other words, can that 20% owner financing, if subordinate to the mortgage, serve as the necessary down payment?
Posted on: 25th Jan, 2010 03:22 pm
not at all likely anymore. those 80/20 deals proliferated several years ago, when everyone foolishly thought that home values would continue to escalate unabated. with the crash of the real estate market and the recognition that 80/20 deals brought people into the mix who had no vesting in their properties, those deals went the way of t-rex and his ilk.
Posted on: 25th Jan, 2010 06:42 pm
im buying my home from my fiance....i don't have the money for a down payment or closing costs, my lender said my fiance can use his equity in the home to pay the down payment and closing costs......how does that work, does anyone know?
Posted on: 02nd Feb, 2010 07:12 am
your fiance can give you a gift of equity, and that will stand as your down payment. further, he can provide you with closing costs assistance of as much as 6% of the purchase price (maximum), and that would take care of all of your financial needs as far as the purchase is concerned.

hopefully, he has sufficient equity in the home to allow for all of this to take place. it would appear so inasmuch as the lender has suggested it.
Posted on: 02nd Feb, 2010 07:59 am
how exactly does a gift of equity work? is that something he has to pay back or pay taxes on?
Posted on: 03rd Feb, 2010 06:03 am
i've seen many posts discussing taxation on gifts, but i'm not a tax advisor and i've never researched anything in that regard. if you have a tax advisor, check with that person; if you don't you can find out from the irs directly as to what taxation is required with gifts of that sort.

as for how a gift of equity works...if the home is worth $200K, and you want to borrow 80% ($160K), he can "gift" you that $40K that you need for down payment. it calls for a "gift letter" that your lender can provide to you. he can also pay your closing costs for you up to 6% of the price, if you need that much.
Posted on: 03rd Feb, 2010 09:06 am
wont work, he's my fiance, we are not married yet, something my retarded loan consultant forgot.
Posted on: 03rd Feb, 2010 02:57 pm
does a domesic partner or fiance quailify for a gift of equity? I have checked out a few web sites that say yes???
Posted on: 04th Feb, 2010 04:59 am
what kind of loan consultant are you working with?

i know of no reason why two people who are engaged to be married wouldn't be able to transfer real estate one to the other by way of a gift of equity. an ordinary gift of funds has been allowable for as long as my memory goes back, and the only difference between the two (funds/equity) is the appellations we give them.

find a consultant who knows the rules is my best analysis of your situation.
Posted on: 04th Feb, 2010 08:02 am
If I do an owner financing on a piece of property that I own, how do I do a closing?
Posted on: 04th Feb, 2010 12:21 pm
Hi Glenda!

Welcome to forums!

You will have to contact an attorney who will help you in drafting an agreement mentioning the terms and conditions of owner financing. During the closing you and the buyer will have to sign the agreement. This will make the owner financing legal and both of you will have a proof of the financing.

Feel free to ask if you've further queries.

Sussane
Posted on: 04th Feb, 2010 09:17 pm
If I were to buy a home through owner financing, does the owner (acting as the lender) have the ability to take loans out on the home even though I've "purchased" it or can he sell the home to someone else and transfer his authority as a lender to someone else.

My main concern is if there is anyway I could lose my home out from under my nose due to the "lender" being able to make the abovementioned decisions? If he can take loans out on the home, what if he defaults on his loans?
Posted on: 04th Mar, 2010 05:00 am
rockcop, that's precisely why you need to engage the services of an attorney - to represent you, yes; but more so to assure you of the validity of your purchase, to assure you that what you fear cannot take place and to assure you that you're making a reasonable decision.
Posted on: 04th Mar, 2010 08:41 am
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