What is Owner Financing?
Owner financing (also called seller financing or seller carry-back) is a transaction structure where the property seller provides financing to the buyer instead of the buyer obtaining a mortgage from a bank. The seller becomes the bank: the buyer makes a down payment, signs a promissory note, and makes monthly payments to the seller over an agreed term with interest.
How owner financing works
The buyer and seller agree on a purchase price, down payment, interest rate, loan term, and payment schedule. These terms are documented in a promissory note and a deed of trust or mortgage. The deed transfers to the buyer at closing, and the seller holds the note. If the buyer stops paying, the seller can foreclose.
Typical terms: 10-30% down payment, 6-10% interest rate (higher than bank rates), 5-30 year amortization with a 3-7 year balloon payment, and monthly payments. The balloon protects the seller from being locked into a long-term arrangement.
Benefits for sellers
Steady monthly income instead of a lump sum. Higher sale price because buyers pay a premium for flexible terms. Spreading capital gains tax over multiple years through an installment sale. Earning interest income on the note. Attracting a larger buyer pool.
Benefits for buyers
No bank qualification required. Faster closing with no underwriting. Flexible terms. Less documentation than institutional lending. Investment property buyers use owner financing to acquire properties with less cash out of pocket.
Dodd-Frank considerations
The Dodd-Frank Act's Ability-to-Repay requirements apply to some seller-financed transactions. However, safe harbor exemptions exist for sellers who finance no more than 3 properties per year and meet other criteria. Sellers who regularly offer financing may need to comply with mortgage lending regulations or use a licensed loan originator. Consult an attorney.
For wholesalers
Understanding owner financing expands your buyer pool. Some investors specifically seek deals where the seller will carry a note. If you can negotiate owner financing terms with a motivated seller, you can market the deal to buyers who might not have all-cash but can handle payments — a different and often less competitive buyer segment.