Owner financing is a type of real estate home sales arrangement in which the buyer obtains financing directly from the person or institution that is selling them the property. This often occurs if the buyer can’t obtain a normal mortgage or home loan for whatever reason. It can also be a viable option in cases where the buyer is unwilling or unable to pay the going market interest rates.
Owner financing is sometimes called "seller financing", "creative financing" or other similar names. It is often related to, but not always the same thing as a contract for deed.
Owner financing is not the conventional method when it comes to real estate finance methods. As such, it is often associated with specific legal issues and concerns. Some of these include:
- Higher down payment: Owner financing is often associated with higher down payments for the buyer compared to those for mortgage loans. It is not uncommon for owner financing down payments to reach up to 20%. This is done to protect the seller’s interests in case the buyer defaults later on down the road.
- Transfer of deed: In most cases, the deed to the home is not transferred until the all of the payments are made; this is something to consider, especially if the buyer is planning to transfer the deed in the future.
- Negotiations: Since no institutional lenders are involved, the parties will have to negotiate all the financing terms on their own. While this can lead to a more tailored finance arrangement, both parties need to be sure that their interests are correctly represented and protected in the arrangement.
Thus, owner financing arrangements tend to be individually tailored to the needs of the seller and the buyer. It’s important that the house be properly appraised and inspected in order for the financing aspects to be fair and equal.
Disputes over owner financing can happen at many different stages. For instance, there may be disagreements or conflicts during the negotiation phases of the sale. Or, a dispute can come up later on, after closing (for instance, with regards to repayment of the financing amounts). These types of disputes may require legal assistance or a lawsuit in order to resolve. In such cases, a monetary damages award will usually suffice as a legal remedy for the non-breaching party.
Owner financing arrangements have many advantages for both parties. However, they need to be done correctly and with proper foresight in order to avoid long-term conflicts. If you will be engaging in an owner financing agreement, it may be in your best interests to hire a real estate lawyer. Your attorney can represent you during negotiations and can review the contract to ensure that your rights are protected. Also, if there are any legal conflicts, your lawyer can help you file a lawsuit and can represent you in court.