Here’s How Owner Financing (aka Seller Financing) Works for Real Estate Deals

Picture this: A buyer asks you to lend them the money to buy your house. It might sound like a wild idea, but it’s actually a legitimate option known as owner financing.

Here’s how owner financing works: In this setup, you, the seller, become the lender instead of the buyer going through banks and mortgage companies. This can make the sale smoother for both parties — buyers get access to funds they might struggle to secure otherwise, and you get to sell your home while possibly earning interest on the loan. It’s a creative way to make the home-selling process work for everyone involved. Below, we’ll cover everything you need to know about owner financing works.

DISCLAIMER: This article is meant for educational purposes only and is not intended to be construed as financial, tax, or legal advice. HomeLight always encourages you to reach out to an advisor regarding your own situation.

What is owner financing?

Also known as seller financing or a purchase-money mortgage, owner financing is an arrangement where the homebuyer borrows some or all of the money to purchase the house from the current homeowner.

In some cases, this occurs because the buyer doesn’t want — or can’t qualify for — a traditional mortgage from a traditional lender.

In other cases, the seller lends the buyer an amount that’s in addition to their traditional mortgage to make up the difference between the amount approved by the bank and the agreed upon price of the house.

For example, let’s say the accepted offer between the buyer and seller is $300,000. The buyer has 20%, or $60,000, to put down on the house, but their mortgage company only approves a loan of $200,000. With seller financing, the seller can lend the buyer the additional $40,000 needed to make up the difference.

However, seller financing isn’t generally expected to be a long-term arrangement. It’s typically a short-term solution until the buyer can arrange a traditional loan for the full mortgage amount — typically within a few years.

Since that’s the case, the terms of these loans are often designed to motivate the buyer to seek out alternative financing. For instance, the terms may include significant annual interest rate increases, or a balloon payment scheduled for only a few years into the loan.

The good news is that, although this setup is a private mortgage loan between two individuals, it is a legally binding contract with specific terms, conditions, and requirements that both parties must follow — and it includes recourse if those terms are not met.

The bad news is that it’s a private loan between two individuals. If you’ve ever had issues lending money to family or friends, it’s understandable for a seller to feel uneasy about extending a larger sum to someone they don’t know.

“Seller financing can go really well if you’re dealing with financially solvent people who have good jobs and are honest,” says Edie Waters, a top-selling agent in Kansas City, Missouri, who’s sold over 74% more single-family homes than her peers.

“That’s the biggest risk the seller takes: ‘Is this person honest? Are they going to abide by the terms of the loan?’”