Owner Will Finance - What Does Owner Financing Mean?

Reader Question: Exactly what does it mean with an ad for a house says "owner will finance"?

This is commonly referred to as owner financing or seller financing. It means the homeowner / seller will allow you to make mortgage payments directly to them. So instead of getting a mortgage loan and paying the seller in one lump sum, you would make monthly payments directly to the seller. The deed does not get transferred from the owner to the buyer until the house has been paid for in full.

Owner financing generally appeals to home buyers who (A) cannot qualify for a mortgage loan with a good interest rate, (B) cannot afford a down payment, or (C) a combination of these factors. In other words, it's typically a last resort for buyers.

I've seen an increase in the number of seller-financing scenarios lately. It has a lot to do with the economy. Many home buyers are unable to get loans through a traditional mortgage lender right now, so a lot of sellers are offering owner financing to potential buyers. It will continue to be harder to get a mortgage loan in 2009, so this type of financing will likely continue to rise.

It's kind of like saying: "We know it's hard to get a mortgage loan right now, but we really need to sell the house. So we are willing to accept payments in lieu of a lump sum."

Another thing to keep in mind is that the seller will set the terms of your mortgage payment, since they are acting as the lender in this type of agreement. The size of the payment, the interest rate, the length of time you have to pay it off ... all of this is determined by the seller in an owner-financing situation.

If you decide to go this route, I recommend using a real estate agent who is familiar with the process. Or better yet, hire a real estate attorney to make sure the property transfer is done right.

From the buyer's perspective, there are various pros and cons associated with owner financing:

• Pros - You don't have to go through the traditional qualification process needed to get a loan. You might not have to put as much money down in advance. There is usually more flexibility in negotiating the terms of the financing.
• Cons - You will probably need legal assistance to make sure everything is legit. There's more room for error, oversight and plain old manipulation when you're dealing with a private individual (as opposed to a government-regulated lender).

This is just a basic overview of how owner financing works. A home buyer who is seriously considering this path should do additional research into the pros and cons associated with it. Hope that helps. Good luck.