Although the home mortgage is by far the most common method used to purchase a home in the United States today, obtaining this type of traditional home financing is not always possible for everyone.

In some cases, this is due to the prospective buyer's credit history or income status. Though it can also be true when the home being purchased does not meet certain appraisal or condition requirements, or when the home does not conform to industry of standard finance requirements - when compared with other homes in the market.

When a traditional mortgage may not be available, the owner or seller of the home may offer to finance the sale themselves to the buyer - at terms agreeable to both seller and buyer. This is usually possible only if there are no other loans, mortgages or liens on the home being sold. In other words, the seller, in order to offer seller financing, must own the home outright.

While most instances of owner-financed home purchases are completed without any problems or issues, there are some items that prospective buyers should know before agreeing to this type of financing arrangement. 

Remember to always speak to a professional to see what kinds of financing will be suitable for your specific situation.

Understanding Owner Financing

Owner financing can take several forms, with the three most commonly used forms being: 

• Land Contract - a land contract is a type of owner financing where legal title does not pass to the buyer until the home is fully paid for and officially deeded over to the buyer
• Promissory Note - similar to a typical mortgage, a promissory note financing arrangement is when the home seller agrees to carry a mortgage for the entire amount of the purchase price, less the amount of any downpayment and with the buyer taking immediate title to the property, subject to any existing loan
• Lease Purchase Agreement - typically the most flexible form of owner financing, a lease purchase agreement gives the buyer equitable title while leasing the property to the buyer with all or a portion of any rental monies being credited toward the agreed upon purchase price

Why Documentation is Important When Using Owner-Financing

One commonly noted problem that may arise during an owner-financed sale results from the lack of proper documentation. This is especially true when the seller and buyer are friends or relatives and rely upon a verbal agreement based on this relationship. If an issue arises that results in a difference of opinion, these relationships can become strained or broken.

To avoid any confusion and protect against future issues resulting from an owner financed property purchase, buyers are often encouraged to insist upon using a trusted real estate professional to prepare a sales contract and to sell or transfer the property through an escrow or title company - as any other real estate transaction. As a result, the transaction is in writing, as well as any other forms and documents that may need to be created and filed, such as a title insurance policy. Once all documents are signed, a copy of the purchase and sale agreement should be legally recorded in the county where the property is located.

When Should Buyers Consider Purchasing an Owner-Financed Home or Property

Owner financing can often be an excellent option for both buyer and seller, as long as the terms are acceptable to both parties. This method of financing may be helpful to buyers who have sufficient income to meet the payments, yet cannot qualify for a traditional mortgage at the current time. It may also be a good deal for buyers who want to purchase a home that needs repairs or renovations before it can be traditionally mortgaged. 

And by using a Lease Purchase Agreement, usually 2 to 5 years, buyers may be able to save the money (often through the lease payments themselves) to buy, and live in, a property that might not have been available to them using a traditional mortgage.

Before considering any owner-financed home purchase, prospective buyers should discuss the matter carefully with their real estate professional and possibly a financial consultant. With their knowledge and guidance, they can help watch out for potential pitfalls and help ensure that your interests as the the buyer of an owner financed property area protected.