How does Owner Financing Work?



In my previous post, I talked a little about buying land on eBay The only way I was able to purchase that homestead land was by the use of owner financing and it is a good way to purchase property if you do not have a downpayment on hand. So I figured I would talk a little bit about owner financing and some of the pros and cons of using owner financing to purchase property.

Traditionally, when someone buys real estate in the US. They will go through a third-party lender. It could be a big bank such as Coldwell Banker or Wells Fargo or a local Credit Union. A person or family will then take out a loan from this lender, for the price the seller is asking for the property. That loan s what we call a mortgage. In this case the lender gives the buyer money to buy the home and the seller walks away with cash in hand. The buyer and seller usually end relations once this transaction is made. Owner Financing,  sometimes also called seller financing, is when the seller of a home, land or some other form of real estate, keeps the mortgage under their name and is paid by the buyer in monthly installments until the seller’s asking price is paid off. So for example. if a seller is looking to sell their home for $100,000. They may offer it at say a 15 year term at an 8% interest rate. The buyer will end up paying about $955/ month for 15 years. Once that term is up, and all payments have been made on time, the buyer then owns the property. The seller will then transfer the deed to their name.

Probably the best thing that owner-financing has to offer is it’s a fast and easy way for someone to move into a home or purchase some property. With a tradition mortgage through a bank. In order get that mortgage, you must qualify. So you must provide information about your income, your credit history, sometimes a background check mud be done. Then you must have an adequate downpayment or the bank won’t even give you the loan. Once you’ve met all those requirements, you can then buy the property but you will also have to ad closing costs on top of that downpayment and the loan itself. It ends up being a very costly affair just getting into a home or on some land. Generally speaking and depending on the owner/seller you go with, owner financing side-steps all those extra costs. There is usually no credit check, no or a small downpayment is required and there are no closing costs. You just agree to buy the property, and you start paying, simple as that. You must always do your due diligence on both the property and the owner but it is definitely a quicker and simpler process than going through a traditional third-party lender.

If you are looking to buy homestead land, you can usually forget about finding a mortgage that will cover it. Lenders don’t like to provide loans on raw land because they is nothing to back up that loan if you decide not to pay and they have to foreclose. Now I’ve never understood this because all the bank would have to do is build a cheap house on the property and the value of the property would soar but I guess this is too much leg-work for the bank. So owner-financing is really your best bet when looking to buy raw land, that is unless you actually have enough money to make a huge downpayment or enough to buy the land outright which few people do considering the increasing costs of land these days.


When it comes to property taxes, the seller usually pays the taxes and the buyer reimburses the seller for the money they put out for these local taxes. Ultimately the buyer pays all local taxes but since the property is still in the seller’s name until the loan is paid off, then all taxes must go through them and are their responsibility to pay. It is a condition for most if not all owner financiers that if the buyer does not reimburse taxes, they can then be evicted from the property. This may seem like a con but it is no different from not paying taxes directly to your local government or failing to pay tax escrow to your mortgage lender. No matter what the situation, if you fail to pay taxes, you will be kicked off of your property. Hence the saying, stop paying your taxes and see who really owns your property, but I digress.

There  are a few cons to owner-financing. The main one being that the buyer does not truly own the home until the seller is paid in full. When you go with a traditional mortgage through a third-party lender you will usually get the deed to the property in your name right away but as mentioned above, this will not happen until the seller is paid in full.  There is also the possibility that the seller could pocket all of your payments  halfway or all the way through your lending period, then they decide you don’t own the home. I’m sure this is an extreme case but it is definitely plausible. This is why it is so important to have a contract detailing all the conditions of the transaction. Another cut is you will almost always pay a higher interest rate from an owner  financed than you will from a bank. This is because in a lot of case, they are still paying the mortgage on the home or property, so they may be paying 6% interest while charging you 8 or 9%. Even those sellers that down have a loan to pay anymore, charge a higher interest rate because people will pay it. You are paying for the convenience of avoiding the upfront cost of getting a traditional mortgage.

So you can see owner financing can be a great option for some depending on what your needs our. It worked great in my situation as I was looking to buy retirement property but did not have a downpayment ready to buy a new property and I am not ready to sell the home that I live in now. People looking to the future to buy land they will need for later, may want to look into owner financing. Land prices will continue to increase, so buying now may make the most financial sense. If you buy now and make regular monthly payment son your land in 15 or 20 years, that homestead land could be paid off and you will then have a place to either retire to or to sell for more money once it is paid off. Either way investing in land is a good idea and owner financing is a good way to get your foot in the door.