What is a Owner Financing Contract?

While a residential mortgage loan is the most common type of financing used to purchase a home, owner financing is an alternative that has advantages and disadvantages for both buyers and sellers.

Owner Financing: An Overview

A home is typically the largest single investment a person ever makes. Because of the high cost, it usually involves some type of financing. Owner financing happens when a home buyer finances the purchase directly through the seller - instead of through a conventional mortgage lender or bank.

With owner financing (also called seller financing), the seller doesn’t hand over any money to the buyer as a mortgage lender would. Instead, the seller extends enough credit to the buyer to cover the purchase price of the home, less any down payment, and then the buyer makes regular payments until the amount is paid in full. The buyer signs a promissory note to the seller, which spells out the terms of the loan, including the interest rate, repayment schedule and the consequences of default.The owner sometimes keeps title to the house until the buyer pays off the loan.

Most owner-financing deals are short term and a typical arrangement might involve amortizing the loan over 30 years but with a final balloon payment due after five. The theory is that after five years the buyer should have enough equity in the home and/or have had enough time to improve his financial situation to qualify for a conventional mortgage loan.

Sources: https://www.investopedia.com/articles/personal-finance/082815/pros-and-cons-owner-financing.asp