Owner financing, or an owner “carry-back’, is when you purchase a home without the assistance of bank, and the underlying lien is held by the seller.
Owner financing can be done by sellers who own the property free and clear and it can also be done by sellers who have an existing underlying lien.
However, for homes with an existing underlying lien, full disclosures must be made to all parties in regard to the first lien holder’s right to call the note due, or “accelerate the loan”.
When purchasing a home using owner financing, here are the most common loan items you will need to negotiate:
- Down payment
- Term of the loan
- Interest rate
When evaluating and negotiating loan terms, there are no set standards, however here are some common practices:
- Down Payment typically needs to be between 5% – 10% and that is usually determined by whether the home is being offered on or off the MLS. However, there are exceptions to this rule.
- The term of the loan is referencing the number of years you have before you need to refinance. This tends to vary but is most commonly somewhere between 5 to 7 years.
- Interest rates will vary depending on the type of transaction it is, but commonly, you’ll find rates between 8% – 10%. Some sellers are also willing to negotiate on that interest rate if you have a larger down payment.
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