Traditional Financing Vs Owner Financing

Owner financing, also known as seller funding, is a non-traditional way to finance a home. It’s rare but a viable option for buyers.

Owner financing is a form of lending where the lender is not involved. The seller becomes the lender. The seller sets the terms and conditions of the transaction.

Owner financing agreements usually last five years and not 15, 30, or more. A balloon payment is due at the end of the 5-year period. The buyer must refinance into a mortgage to pay off the seller.

Traditional Financing vs Owner Financing – A Quick Comparison

Traditional Financing

A traditional loan is one that you get from a lending institution like a credit union, bank or mortgage company. These loans may be conventional, nonconforming or government-backed.

The buyer gives the seller the check to pay for the house and, if necessary, their bank will send the money to your bank to cover the outstanding mortgage balance.

Traditional financing includes mortgage options like VA (Department of Veteran’s Affairs), FHA (Federal Housing Authority), and others.

These loans are backed up by the government but are funded by a traditional bank. These loans are advantageous to buyers, as they require less down payment than traditional mortgages. They’re also easier to get for those with bad credit.

A major difference between government-backed loans and other types of loans is that lenders need to verify that the asset backed by the loan is in good condition. When a buyer applies for a VA loan or FHA, the home must meet the “minimum standards” set by the government agency that is backing the loan.

Owner financing does not have any such requirements.

Owner Financing

This type of mortgage is a combination of the homeowner acting as the lender, and the buyer paying for the house in monthly installments.

Owner-backed finance can come in many forms. Both the buyer and the seller should consult an attorney for assistance and to review all the documents.

Although it is not impossible, it’s rare for a seller to finance the loan over 15 or 30 year period like a mortgage. Sellers don’t usually want to be a lender forever.

The buyer will usually pay the owner-financer a monthly payment for the first five years. After that, a balloon repayment is due. The buyer will then need to take out a loan from a lender and pay the seller any remaining amount.

Is owner financing a good idea?

Owner financing is beneficial to the seller, as the owner makes more money on the deal by obtaining interest and avoiding closing costs than if they sold it outright.

It’s still a risky proposition. The property will revert to the original owner if a buyer defaults. However, they may have caused expensive damage that is now their responsibility.

Owner financing is usually more expensive for buyers and comes with a higher rate of interest. In addition, owners will often require a large down payment. Each deal is unique, so it’s best to have an attorney review the contract.

The buyer should be aware of the fact that, if he or she cannot find financing by the end the owner-financed mortgage loan, the home they paid for and the money already paid can be lost.

Owner-financing, on the other hand, is usually only available to property owners who own it outright.

Owner financing is a great option for buyers who do not qualify for conventional financing. Negotiate favorable terms. The seller can benefit from owner-financed transactions, so it’s important to have a buyer’s representative on your side.