Source: The Ascent —
There are at least two good reasons a potential home buyer may turn to owner financing. Perhaps their credit score is not high enough to qualify for a traditional mortgage, or they’re hoping to buy time to save for a larger down payment but want to purchase a house now. As attractive as owner financing may be, it’s not without its problems. Here, we explain how owner financing works, what to look for, and what to avoid.
What is owner financing?
Owner financing allows you to pay for a new home by making payments directly to the former homeowner. There’s no traditional mortgage in place and no mortgage fees to pay — not at first, at least. Typically, a seller self-finances the transaction for five years, often at a higher interest rate than a mortgage lender would charge.
At the end of the five-year period, a balloon payment for the outstanding balance is due. That means that the new homeowner must either secure a traditional mortgage or come up with the funds in another way to pay off the loan carried by the seller.
How it works (in a nutshell)
- The buyer makes a down payment, although the amount is negotiable.
- Monthly payments are made directly to the seller for five years.
- During those five years, the buyer has time to put money into savings for a larger down payment (if they so desire) and closing costs.
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