The basics of financing by owner homes

Among the many options for home financing available to buyers, financing by owner homes often offer the most flexibility. By working with an individual seller rather than a mortgage lending institution, you have the opportunity to skip considerable amounts of red tape and extra fees.

But what exactly is owner financing? Here are some of the basics buyers should know:

What is owner financing?

Owner financing, also called seller financing, is when the owner of a property for sale provides partial or complete financing to the buyer directly. The agreement is similar in concept to a mortgage loan, only that the property owner owns the debts. Owner loans typically do not appear on buyers' credit reports for a particular transaction.

How owner financing works

Owner financing agreements work similarly to conventional mortgage loans. However, the seller provides credit to the buyer to cover the purchase. The buyer pays the owner back directly rather than a third-party lender. In most cases, the owner holds on to the title until the home has been completely paid off.

Typical owner financing conditions

As with all real property contracts, owners' financing arrangements need to be detailed in writing so both the buyer and the seller know the responsibilities of the contracts. Owner financing agreements require signing a promissory note including details on the interest rate, repayment schedule and the consequences of default.

Pros & cons of owner financing

For buyers, there are multiple advantages to an owner financing agreement. This type of financing is much quicker than working with a mortgage lender, and doesn't come with any bank fees or appraisal costs. It can be a great option for buyers who have trouble getting financing for other reasons like bad credit.

However, one major disadvantage of this type of agreement is a higher interest rate. Also, some agreements require a large balloon payment due after a certain number of years.

Is owner financing the right way for you to buy a home? Keep these key facts in mind when weighing your options for financing your dream home.