Owner Financing For Homeowners 101

When and How to Lend to Your Home Buyer

Owner Financing For Homeowners 101
January 2, 2020

You are a simple homeowner who wants to sell your home, not a lending institution – so why would you want to consider financing a buyer to purchase your home? In fact, there are a few advantages that could make owner financing worth your while.

Buyer Enticements – If the market is flooded with homes for sale, credit is tight, or your house is not selling well for other reasons, owner financing allows you to come up with more creative down payment or monthly payment terms to attract buyers.

Monthly Income – Rather than taking lump sum proceeds, you may prefer to have the security of a monthly income of mortgage payments plus interest. This also spreads out your taxes over time, as opposed to taking one large tax hit on the lump sum.

Owner financing is great for selling investment homes if you do not require a lump sum right away for a different purchase.

Higher Interest – You will probably be able to charge a higher interest rate, further increasing your overall return compared to a traditional sale.

Consider the comparison between a traditional sale where you invest your post-tax proceeds and owner financing where you receive regular higher interest rate payments on the pre-tax sale price. You would need a considerably higher return on your lump sum investment to come out ahead.

Owner financing works best when you own your home outright. Generally, if you still owe money on the home, it is difficult for you to finance a potential buyer.

Unless you receive a large enough down payment from the buyer to pay off the remaining mortgage, you could be subject to foreclosure. In most mortgage contracts, lenders have the right to demand full payment upon sale – a big problem if you lack the funds.

The lender is fine with this arrangement if your mortgage is assumable. Check your mortgage contract or with your lender if you are unsure of your terms.

Assuming you have decided you are open to owner financing, how do you proceed?

Define Your Limits – You can either set out your own financing terms (recommended) or let the buyer propose their terms. In either case, you need to define the limits of what you will accept.

Start with the cash flow aspect. What is the minimum down payment you can live with? Can you afford to draw out the income over 30 years or will you need more cash at an earlier date?

Next, consider the basic type of owner financing that you are willing to offer. You can carry the whole mortgage as a promissory note (minus down payments), or carry a partial (secondary) mortgage to bridge the gap between the buyer and a traditional lender. Keep in mind that with a secondary mortgage, whoever holds the first mortgage gets first claim in case of buyer default – and that is not you.

If you are concerned about potential default, you can establish a land contract instead with an equitable title – effective co-ownership with the title transferred upon the final payment.

Leasing to buy is another potential option. In that case, the contract is set up as a traditional lease arrangement with an option to buy after a specified time. You can set the terms of future purchase in the initial contract. This gives you and the buyer a trial period to verify that you are both comfortable with a future purchase.

There are many other possible structures, limited mostly by your level of creativity (but let’s not forget legality and common sense). In essence, you can design your terms to match your needs.

Publicize – Include in your real estate listings that you are open to owner financing, and if you have specific terms in mind, have an information sheet ready for those that respond to your listing.

Vet the Buyer – Be like a traditional lender in screening your buyer, especially if they are requesting owner financing because they cannot get traditional financing. If banks considered your potential buyer a credit risk, what leads you to think differently?

Negotiate Final Terms – Be flexible, but stay within the limits you defined above. Do not be afraid to walk away from a bad deal.

Retain Professional Help – You may not need a banker, but you still need a lawyer. A suitable real estate professional is advisable to draw up all the contracts and the remaining paperwork necessary for filing records of the sale. If your terms are unusually creative, you may benefit from tax specialists as well.

With some care, owner financing can be a great way to use flexibility to your advantage when selling your home. Owner financing does carry risks, especially potential default – but the rewards may well be worth it in your situation.

Photo ©iStock.com/nico_blue

  Conversation   |   10 Comments

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Steffanie | 03.02.16 @ 15:32
I didn't even know some of these options were available if you wanted to sell your home on your own. Thanks for this comprehensive list. We will definitely be looking into this when the time comes to sell our home.
Sara | 03.02.16 @ 15:32
That is a lot of information to take it. However, it is good to see this written down in plain terms. Wish we had this when we went to buy.
irene | 03.02.16 @ 15:33
Good info but I just don't see myself as wanting to be a lender
Elaine | 03.02.16 @ 15:34
Didn't know about several of these options. I'm not in the market at the moment but will keep this in mind when the time arises
Erin | 03.02.16 @ 15:34
I had no idea owner's COULD finance. That is a very interesting twist to selling your home. I'm not sure I would be comfortable with it, but it would definitely be an option to look into. Thanks for bringing this to my attention!
Carla | 03.02.16 @ 15:34
I would love to find an owner financing for my son. I would want everything in writing because I've known some to get burned by this after a large down payment was made.
Chrisitna | 03.02.16 @ 15:34
I wish there were more options like this in my area!
Sarah | 03.02.16 @ 15:34
This is pretty interesting. Not sure I'd be up to the task though, especially in the area I live in.
trish | 03.02.16 @ 15:38
My friend has had her house on the market for a year, with two different realtors. She and her husband are contemplating selling on their own, due to frustration. Definitely sharing this one with them to help them decide.
Jo Ann | 03.02.16 @ 15:41
My daughter did an owner financed deal when she bought her home. It was great because she couldn't get traditional financing because of past credit issues. She did have a decent down payment, but her interest is a little higher than regular financing, but she does have the option to refinance anytime she wants, Great for people just starting out.
$commenter.renderDisplayableName() | 11.27.20 @ 09:27