How Does Owner Financing Work?

Owner Financing Arrangement

How does owner financing work? Whether you are selling or buying a home, this is a question that you may want to learn more about. Sellers who are considering extending owner financing to potential buyers should take the time to learn about what this type of finance arrangement really involves before making a final decision.

Owner Financing Explained

The phrase "owner financing" is used to refer to a real estate financing arrangement in which the owner of the property functions as the lender. Rather than seeking a mortgage loan from a bank or mortgage company, the purchaser borrows the money necessary to finance the purchase of the property directly from current owner. Owner financing arrangements can be made for all or part of the purchase price of the home.

Reasons Sellers Offer Owner Financing

Many sellers find offering owner financing to be appealing, particularly if they own the property free and clear at the time of the sale. Rather than receiving a single lump sum payment that may have significant tax implications, the owner can spread income from the sale of the property out over a period of time plus earn additional income from interest on the loan.

In addition to these benefits, offering owner financing can facilitate a faster sale in many circumstances. When owner financing is available, the pool of potential purchasers is larger. Not everyone can qualify for a mortgage loan from a bank or mortgage company. Individuals who do not have the means to pay cash for a property but who aren't likely to meet lender financing requirements often seek out properties where owner financing is a possibility.

Understanding How Does Owner Financing Work

With owner financing terms, the seller of the property seller literally functions as the bank. The seller holds the note on the property and the purchaser must make principal and interest payments directly to the owner per the terms of the agreement entered into by both parties. If the borrower does not make payments in a manner consistent with the finance agreement, the owner can foreclose on the property.

A Quit Claim Deed is typically taken out at the time of the sale to facilitate the property's transfer back to the owner if the purchaser does not make payments as required. As with a bank loan, if such action is necessary, the purchaser will lose any money that he or she has paid toward the purchase of the property.

Owner Financing Compared to Lease-Purchase

Owner financing is not the same as entering into a lease-purchase agreement with a tenant. With a lease-purchase agreement, the owner acts as a landlord. The tenant is able to apply money paid for rent toward the purchase price of the home if he or she chooses to exercise the right to buy specified in the rent-to-own agreement, but does not become the owner. The owner is responsible for maintaining the property and bears the liability should the home become damaged. At the end of the lease term, the tenant can simply walk away, leaving the owner to seek a new tenant or purchaser for the home.

What Owner Financing Means for You

If you are in the market to purchase a home and feel that owner financing may be the best option for you, target your search on properties that are marketed as possible owner finance opportunities. Additionally, look for properties where owners may have the means or motivation to carry a note and ask if an owner finance arrangement may be possible. This could mean looking at properties that have been used for rental income over the years as well as homes that have been for sale for a long time.

If you are selling a home and are open to entertaining the possibility of owner financing, share that information with the real estate agent who is listing your home. This will help him or her facilitate the sale by marketing the property appropriately. Of course, make sure that you are familiar with how does owner financing work before making a final decision. Enlist the services of a skilled real estate attorney to draw up the papers so that you can be certain that your rights are protected and risks minimized.

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How Does Owner Financing Work?