Pros and Cons of Owner Financing a Home

There is always something new to learn in the world of real estate. While you may be familiar with FHA loans or Conventional loans, you may not be as familiar with Owner Financing.

 

Owner Financing is when the seller uses their capital to purchase the home for the buyer, and they create an agreement for repayment. 

 

While this option can be good for some circumstances, it isn’t always right for everyone. Below we will list the pros and cons for both the seller and buyer.

Pros for Buyers

  • Faster closing: No waiting for the bank loan officer, underwriter, and legal department to process and approve the application.

 

  • Cheaper closing: No bank fees or appraisal costs.

 

  • Flexible down payment: No bank- or government-required minimums.

 

  • Alternative for buyers who can not get financing: A good option for buyers who are not able to secure a mortgage.

Cons for Buyers

  • Higher interest: The interest you pay will likely be higher than you would pay to a bank.

 

  • Need seller approval: Even if a seller is down for owner financing, they might not want to be your lender.

 

  • Due-on-sale clause: If the seller has a mortgage on the property, then their bank or lender can demand immediate payment of the debt in full if the house is sold (to you). That’s because most mortgages have due-on-sale clauses—and if the lender isn’t paid, then the bank can foreclose. To avoid this risk, make sure that the seller owns the house free and clear or that the seller’s lender agrees to owner financing.

 

  • Balloon payments: With many owner-financing arrangements, a large balloon payment becomes due after five or 10 years. If you can’t secure financing by then, you could lose all the money you’ve paid so far—plus the house.

Pros for Sellers

  • Can sell “as is”: Potential to sell without making costly repairs that traditional lenders might require.

 

  • A good investment: Potential to earn better rates on the money that you raised from selling your home than you would from investing the money elsewhere.

 

  • Lump-sum option: The promissory note can be sold to an investor, providing a lump-sum payment right away.

 

  • Retain title: If the buyer defaults, then you keep the down payment, or any money that was paid, and the house.

 

  • Sell faster: Potential to sell and close faster since buyers avoid the mortgage process.

Cons for Sellers

  • Dodd-Frank Act: Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, new rules were applied to owner financing. Balloon payments may not be an option, and you might need to involve a mortgage loan originator, depending on the number of properties that the seller owner-finances each year.

 

  • Default: The buyer could stop making payments at any time. If this happens, and they don’t just walk away, then you could end up going through the foreclosure process.

 

  • Repair cost: If you do take back the property, you might end up having to pay for repairs and maintenance. Depending on how well the buyer took care of the property.