Editorial & Advertiser Disclosure Global Banking And Finance Review is an independent publisher which offers News, information, Analysis, Opinion, Press Releases, Reviews, Research reports covering various economies, industries, products, services and companies. The content available on globalbankingandfinance.com is sourced by a mixture of different methods which is not limited to content produced and supplied by various staff writers, journalists, freelancers, individuals, organizations, companies, PR agencies Sponsored Posts etc. The information available on this website is purely for educational and informational purposes only. We cannot guarantee the accuracy or applicability of any of the information provided at globalbankingandfinance.com with respect to your individual or personal circumstances. Please seek professional advice from a qualified professional before making any financial decisions. Globalbankingandfinance.com also links to various third party websites and we cannot guarantee the accuracy or applicability of the information provided by third party websites. Links from various articles on our site to third party websites are a mixture of non-sponsored links and sponsored links. Only a very small fraction of the links which point to external websites are affiliate links. Some of the links which you may click on our website may link to various products and services from our partners who may compensate us if you buy a service or product or fill a form or install an app. This will not incur additional cost to you. A very few articles on our website are sponsored posts or paid advertorials. These are marked as sponsored posts at the bottom of each post. For avoidance of any doubts and to make it easier for you to differentiate sponsored or non-sponsored articles or links, you may consider all articles on our site or all links to external websites as sponsored . Please note that some of the services or products which we talk about carry a high level of risk and may not be suitable for everyone. These may be complex services or products and we request the readers to consider this purely from an educational standpoint. The information provided on this website is general in nature. Global Banking & Finance Review expressly disclaims any liability without any limitation which may arise directly or indirectly from the use of such information.

How does owner financing work?

Buying a house is usually one of the biggest financial decisions you would take. Everyone would like to own a dream house, but it would obviously cost money and usually, it would be big money.When you decide to buy a house, in all probability, you would look for financing to help you raise funds for your purchase. In most cases, people approach banks for a mortgage loan.

Owner financing is an option you can consider to raise finance to buy a house. 

What is owner financing?

In owner financing, instead of taking money from a bank or a lender, you get the financing from the seller or the owner of the house. This is why it is also called as seller financing. When you get financing from a bank, you borrow money and buy the house and repay the loan to the bank every month in installments, till you clear the loan. If you go for owner financing, you approach the owner of the house and obtain credit from him. The owner or seller does not give you a loan but gives you credit, minus any down payment which you may need to make just as in the case of bank loan. Every month you make a payment to the owner, to pay off the interest and the principal.

A promissory note is signed, where all details of the transaction like the loan amount, interest rate, term of the loan, the schedule for repayment and other conditions are mentioned. The house remains in the name of the owner. As soon as you clear the loan, it is transferred to your name. 

Terms and conditions

Generally, in owner financing, a down payment of anywhere between 5-25% of the home value would be expected. On an average, you may have to budget at least 20% as down payment and keep the money on hand.

Banks usually give you a loan amortized for a period of 30 years. But in owner financing, a seller may not be ready to wait for such a long period to get his money. They usually insist on a 15 year period or maximum of 20 years.

You may be asked to pay a balloon payment after 10 years (for a 15-year term), which means that after 10 years, you have a lumpsum amount equalling the balance. 

Advantages of owner financing

The main advantage of owner financing is the process is faster, unlike bank loans where there are a lot of procedures to be followed. Down payment, as well as monthly payments, can be negotiated since you are dealing with an individual and not an institution. If for any reason, like a low credit score, you can’t get a loan from the bank, then this is a very advantageous option. For the seller, the benefit is ownership remains with him till the end of the loan term and he can also get a higher interest rate. 

Limitations of owner financing

For the buyer, the interest rate would be higher as compared to a bank. Also, you may need to pay a large amount as a balloon payment. If you don’t have the cash at that time, you may have to borrow again. For the seller, the risk is that if the buyer doesn’t pay, then the legal process has to be initiated to recover the amount and make him vacate the house.

Owner financing is a good option for home buyers, who can pay monthly payments directly to the seller instead of dealing with the bank. It is a more flexible arrangement and avoids all the hassles and cumbersome procedures that you encounter with bank loans.