The Mechanics of Owner Financing

When selling your home, you want to make sure it is attractive to all who view it. The same is true for the terms of the sale. A prospective home owner will be more likely to consider buying your home if it is presented in the best possible light. This also means choosing flexible terms. The offer will be one the buyer can’t refuse and your house will sell more quickly.


Owner financing is an important part of your sale. Understanding the mechanics is essential.


Let’s say you begin with a property that is owned free and clear. This means there are no mortgage liens on it. You owe nothing to the bank. You agree to sell it for $100,000 with the terms 5 percent down and owner-financing for $95,000. This equals 95 percent of the purchase price. The buyer agrees and pays the $5,000, thus agreeing to pay the remaining $95,000 as discussed. You deliver the deed turning over ownership of the property to the seller. The promissory note, ( promise to pay), is secured by a mortgage recorded against the property as a lien in your favor. Here, you will act as lender, funding part of the purchase price of the home. You can set a balloon date in the promissory note designating when the loan is to be paid in full. When this date arrives, the buyer must either sell the home, or obtain a loan from a traditional source. This would include a bank or mortgage lender. Once this new loan is obtained, you will be paid off and the lien removed from the property. Some states use a different form of mortgage known as a “deed of trust”.


It is possible to execute owner financing with a mortgage and some equity. Let’s say your home has some equity because it has appreciated in value since it was purchased, or you made a sizable down payment when purchasing it. Let’s say you own a property that is worth $100,000 and it is encumbered by a $80,000 mortgage. You agree to sell it for $100,000. Because there is $20,000 in equity, ($100,000 minus $80,000), the buyer offers to pay $10,000 as a down payment and borrow the balance of the $90,000 from a mortgage lender. At the last minute, the lender decides not to fund the loan. Instead, the lender decides to fund only $80,000, which is $10,000 short.


Here you could decide to drop the price of the home. If you don’t feel this is a good option, you can always simply put the house back on the market. One more option is to accept a promissory note for $10,000 as part of the purchase price. At closing, the buyer will pay down $10,000, borrow $80,000, and give you a promissory note for $10,000. You sign over the deed to the buyer and the buyer signs a mortgage lien to the lender for $80,000. The lender will then possess a first lien on the property. The buyer will also sign a secondary mortgage lien over to you. After a year has passed, the buyer can then obtain another loan of $90,000, thus paying off both mortgage liens. In the meantime, the buyer makes interest payments to you on the $10,000. This will be a nice income stream for you the seller.


Understanding the mechanics of owner financing is important. There are other options you can use as well. If you are unsure about them, ask your realtor or a mortgage lender for more information.

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