The basic idea behind owner financing is that the seller of a property offers not only the property for sale but also the mortgage to buy it. The buyer of a property then provides a cash down payment to the seller. At that point, the buyer begins making monthly mortgage payments to the seller of the property. In many cases, the seller financing agreement has a balloon payment due at some date in the future. This allows the buyer to have plenty of time to build up his credit and then refinance the loan.
Types of Loans
Owner financing could take one of many different forms. One type of owner financing is the all-inclusive mortgage. This kind of loan is provided by an owner who owns the property free and clear. With this kind of mortgage, all of the financing for the property is offered by the seller. Junior mortgages involve financing a portion of the sale through owner financing and another portion through bank financing. The seller agrees to take a junior position on the mortgage and allows a traditional loan to have the primary position.
Owner financing provides some benefits for both buyer and seller. For example, the seller can attract more potential buyers for the property and can charge more than he would ordinarily be able to charge. The buyer in this type of transaction can also get approved for a loan even if he has questionable credit. Sellers in these transactions are often trying to unload properties that they are having a hard time selling and they have to be willing to work with buyers who have poor credit scores.
For the seller in this kind of transaction, several problems could arise. For example, if the down payment is not substantial enough, the buyer might be inclined to stop making payments or walk away from the house. For the buyer in the transaction, this could also lead to complications. For instance, the buyer might be counting on the property owner to make a payment on the original mortgage with part of the money that he is paid. If the payment is not made, the bank might foreclose on the property.