Owner financing means you act as the bank. The buyer pays you a down payment, then monthly payments with interest, instead of getting a bank loan. It can sell a house faster and bring in steady checks. It also comes with real risks.
Here's a plain look at both sides, from someone who buys these notes for a living.
Short version: Owner financing works best if you own the house free and clear, don't need all your cash at once, and get a real down payment from a buyer you've checked. Set it up right, and you can sell the note later if you ever need the cash.
The pros
- More buyers. Self-employed people, people with a thin credit file, and people who can't get a bank loan can still buy.
- A faster sale. Houses that won't pass a bank appraisal can still sell.
- A higher price. Buyers often pay more for flexible terms.
- Interest income. You earn interest on the balance, often for years.
- Taxes spread out. An installment sale can spread the gain over the years you collect. Ask your CPA.
- You can still cash out. A note set up right can be sold later, all or in part.
The cons
- You don't get all your money at once. Most of it comes in over years.
- The buyer might stop paying. Then you deal with foreclosure or forfeiture, which takes time and money.
- You still have to watch the property. Taxes and insurance need to stay paid.
- Rules apply. Federal and state rules cover seller financing on homes. Use a licensed RMLO and an attorney.
- It ties up your equity. If you need that money for your next home, owner financing may not fit.
Who it works for
Owner financing is a good fit if you:
- Own the house free and clear, or owe very little
- Don't need all the cash from the sale right away
- Like the idea of monthly income
- Have a house that's hard to sell with bank financing
- Can find a buyer with a real down payment
It's a poor fit if you:
- Need the full sale price to buy your next home
- Still owe a lot on your own mortgage. Most mortgages have a due-on-sale clause
- Don't want to deal with a payer who might fall behind
What if you still owe on the house?
If you have a mortgage, owner financing gets tricky. Most bank loans let the bank call the loan due if you sell. Some sellers use a wraparound, where the buyer pays you and you keep paying the bank. That carries real risk. Talk with an attorney before you try it.
How to protect yourself
These steps also make the note easier to sell later:
- Get at least 10% down, and 20% if you can
- Have a licensed RMLO check the buyer's credit and income and set up the loan
- Use a recorded mortgage or deed of trust, drafted by an attorney or title company
- Use a licensed loan servicer to collect payments and keep records
- Stay on the insurance as the mortgagee
The full list is in how to set up a seller-financed note that's easy to sell later.
You can change your mind later
Many sellers worry they'll be stuck with a note for 20 years. You won't be. You can:
- Sell the whole note for a lump sum
- Sell part of it to cover a big expense. See sell just a few payments
- Keep collecting until it's paid off
A note with a year or more of on-time payments brings the best price. Read how much is my mortgage note worth.
Frequently asked questions
Is owner financing a good idea?
It can be, if you own the house free and clear, get a real down payment, check the buyer, and set it up with an attorney.
What are the risks of owner financing?
The buyer could stop paying, taxes or insurance could lapse, and you don't get all your cash at once. Good setup lowers each of those risks.
Can I sell my owner-financed note later?
Yes. You can sell all of it or part of it. A note set up right and paid on time sells best.
Can I offer owner financing if I still have a mortgage?
It's risky. Most mortgages have a due-on-sale clause. Talk with a real estate attorney first.
How much down payment should I ask for?
At least 10%. 20% or more makes the deal safer and the note worth more.
Already holding a note? See what it's worth or get a free quote.
Larry has invested in real estate since 2006 and has bought more than 300 mortgage notes. He runs LJH Investments, LLC, an Ohio company based in Madison, Indiana. More about Larry
This article is general information, not legal or tax advice. Laws change. Talk with your own attorney and tax adviser about your situation.