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.

Most owner-financing deals are short term and a typical arrangement might involve Interest only loan that balloons in 3 years. The theory is that after 3 years the buyer should be ready to build and will pay off the note with their construction loan.

Owner financing can be a good option for both buyers and sellers when the buyer wants to build quickly.