What is an Owner Financed Note?

 

What is an Owner Financed Note?

How does owner financing work?

What makes it different than a traditional bank loan?

When a seller allows a buyer to make payments over time for the purchase of property, it is known as owner financing or seller financing.

This private financing by the seller can take the place of a bank loan or be in addition to a conventional mortgage.

The payment amount, interest rate, and other terms are agreed upon between the buyer and seller. The amount financed by the seller will depend upon the buyer’s down payment and whether there are any bank loans.

Here’s an brief sketch of how seller financing works…

  1. A property owner advertises a house for sale, either on their own or through an agent.

  2. A buyer makes an offer, and they agree upon a sales price of $175,000 with a 10 percent down payment of $17,500.

  3. Instead of requiring the buyer to obtain a bank loan, the seller carries back the balance of $157,500 in the form of a note and mortgage.

  4. The note dictates the terms of repayment. In this case, the terms are 8.5 percent interest with payments of $1,211.04 a month based on a 30 year amortization schedule.

  5. The seller may not want to wait the full 30 years to pay off the note, so the seller can require payment in full, known as a balloon payment, within seven years.

  6. A title company or real estate attorney is used for the closing to be sure all parties are protected and the documents are in compliance with and state laws.

Bank Loan vs Seller Financed Mortgage Notes

Because the buyer is making payments to the seller rather than an institutional lender, the legal arrangement is called a private mortgage, seller carry-back, installment sale, or owner financing.

The seller has the same mortgage rights as a bank, so if the buyer does not make payments, the seller has the legal authority to foreclose and take the property back.

If the seller prefers to receive cash today rather than payments over time, the rights to future payments can be sold or assigned to a note investor.

 
EPIC Notes