Owner Financing

· 2 min read
Owner financing is just another name for seller financing — you sell your property and personally loan the buyer the money to buy it, collecting…

Owner financing is just another name for seller financing — you sell your property and personally loan the buyer the money to buy it, collecting monthly payments instead of a lump sum. The terms mean the same thing, though “owner financing” tends to pop up more in FSBO deals and land sales.

The Basics

You and the buyer agree on a sale price, down payment (typically 10-20%), interest rate, and payment schedule. The buyer signs a promissory note and you place a lien on the property. If they stop paying, you can foreclose — just like a bank.

Most owner-financed deals use a balloon payment structure. The buyer makes monthly payments for 5-10 years, then owes the remaining balance in one lump sum. The expectation is they’ll refinance with a traditional lender before the balloon comes due.

Common Structures

A land contract (contract for deed) is popular in owner financing. The buyer gets possession but you retain legal title until the note is paid in full. This gives you stronger protection if the buyer defaults — you don’t have to go through full foreclosure.

A wraparound mortgage works when you still have an existing mortgage. The buyer’s payments to you cover your mortgage plus profit. This is riskier and requires careful structuring with an attorney.

Interest Rates and Terms

Owner-financed rates typically run 1-3% above conventional mortgage rates since you’re taking on more risk than a bank. If current mortgage rates are 6.5%, an owner-financed deal might carry 8-9%. That premium compensates you for skipping the bank’s underwriting safety net.

Down payments should be substantial — at least 10%, ideally 20%. A buyer with real money invested is far less likely to walk away from the property.

Legal Requirements

Dodd-Frank regulations require certain disclosures and restrict predatory terms. If you do more than three owner-financed sales per year, you may need a mortgage originator license. Always use a real estate attorney to draft the paperwork.

Learn more selling strategies in the selling guide, and browse the glossary for related terms like seller disclosure and closing agent.