This is when a property seller lends the buyer money to purchase the property on sale. Instead of the buyer going to a bank or other lending companies, they get financial aid from the seller. This is why owner financing is also called seller financing.
To protect the interest of the seller, a promissory note is executed between the buyer and seller. This will outline interest rate, schedule of repayments, and the consequences in the event that a buyer defaults on loan repayments.
Owner financing arrangement are often short-term because it works in the premise that a buyer will be able to refinance before the loan matures. The terms could be for a five-year loan with a balloon payment upon maturity.
A seller offers financing to:
- Minimize the cost of carry while waiting for a deal to close or for the perfect buyer
- Sell a property faster, especially in a down market
- Increase the chances of selling at full asking price
- Get a down payment to buy another property or get money to pay debt
- Avoid paying monthly expenses associated with home ownership
Why should buyers agree to owner financing?
- Faster closing process because there is no need to wait for a loan to be approved.
- Lower closing costs since there’s no need to pay for appraisal costs and bank fees.
- Flexible down payment, what with the amount contingent upon what the seller and buyer agree on.