Is owner financing a good deal for the buyer?

Is owner financing a good deal for the buyer?

It can be. Owner financing is a fair deal for a buyer when the rate is reasonable, there is no balloon you cannot pay, the paperwork is recorded and the title is clear. It is a poor deal when the total cost is far above what a bank or credit union would charge, or when one missed payment could cost you the home and everything you put into it.

In owner financing (also called seller financing), the seller acts as the bank. You pay a down payment, sign a promissory note (a written promise to repay the rest on set terms), and send monthly payments to the seller instead of a lender. It is common with low-priced homes, mobile homes and land, where banks often do not want to make small loans.

This guide is written for you, the buyer. It uses one example throughout: a $7,500 home, $1,500 down, and $6,000 at 15% for 36 months. The numbers are hypothetical; put your own into the calculator.

Owner financing cost calculator

Enter the price, your down payment, the rate and term the seller offers, any fees at signing, and the rate a bank or credit union would give you. It shows the payment, the total you pay, the APR with fees and what the same home costs at the other rate.

With the defaults, the payment is $207.99 a month and you pay about $8,988 in all for the $7,500 home. At 9%, the same home would cost $8,369: about $619 less.

How much does owner financing cost in total?

Add the down payment, every monthly payment and any fees. That total, not the monthly payment, is what the home really costs you.

Two things set that price: the rate and the term. Here is the same $6,000 at different rates, over 36 months and over 60:

A longer term lowers the payment and raises the total. At 15%, stretching from 36 to 60 months saves you $65 a month and costs about $1,077 more in interest. If you can afford the shorter term, it is the cheaper one.

The rate matters more as the amount grows.

What is the APR on owner financing, and how do fees raise it?

The APR (annual percentage rate) is the yearly cost of the credit with fees counted in. With no fees, the APR on a simple note equals its rate. With fees, it is higher, because you pay interest on $6,000 but only received $6,000 minus the fees.

A seller who finances only a few homes may not count as a “creditor” under federal Truth in Lending rules (the test counts, among other things, more than 5 loans secured by a dwelling in the previous calendar year). If so, you may never get an APR in writing. Work it out yourself with the calculator above, using every fee you will pay.

Owner financing vs a bank or credit union loan

Get a quote from a bank or credit union first, even if you expect a no. It tells you what the owner financing is costing you.

In this example, owner financing costs about $919 more. That gap is the price of the seller’s convenience. Sometimes it is worth paying, and sometimes a little more effort with a lender saves it.

• Where owner financing can help you: a faster closing, a down payment and schedule you can negotiate, fewer fees, and a way to buy a low-priced home or a mobile home that lenders will not finance.
• Where it can cost you: a higher rate, a balloon payment, fewer required disclosures, and the risk that the seller keeps the title or still owes a mortgage on the property.

Questions to ask before owner financing

Read the note and every other paper before you sign, and get a copy of each one. These are the questions to get answered in writing:

• What is the rate, and is it fixed? If it can change, when and by how much.
• Is there a balloon? If the payment is figured over 60 months but the balance is due after 36, you will owe a lump sum. On $6,000 at 15% that is $142.74 a month, then $2,943.89 at the end. Know how you would pay it.
• What are the late fees and the grace period? How many days late before a fee, and how much.
• What counts as default, and what happens then? How much notice you get, whether the whole balance can be called due, and how long you have to catch up.
• Can I pay early without a penalty? That is your way out to a cheaper loan later.
• Who holds the title, and when do I get it? Does the deed or title pass to you now, with the seller holding a lien, or does the seller keep it until the last payment?
• Does the seller still owe a mortgage or any lien on the property? The CFPB warns that a seller might not disclose a lien or mortgage they still owe. If the seller stops paying their own lender, the home can be at risk even if you paid every month. A title search answers this.
• Will the papers be recorded? Recording, or noting your interest on the title, is what shows the world your claim.
• Who pays the property taxes and insurance, and how will I know they are paid? The CFPB notes that in a contract for deed the buyer usually pays these, and that a seller may fail to pay taxes or insurance with money you gave them.
• How do I pay, and how is each payment recorded? Pay in a way that leaves a record (a check or bank transfer, not cash), and keep every receipt.

The CFPB’s advice before a contract for deed is to ask an expert first, such as a HUD-approved housing counseling agency. A real estate attorney in your state can review the note and the title.

What happens if you miss a payment on owner financing?

First, whatever the note says: usually a late fee after a grace period, then a default notice. After that it depends on the paperwork and your state.

• If the title passed to you and the seller holds a mortgage, deed of trust or lien, taking the home back usually means foreclosure (for real property) or repossession (for a mobile home titled as personal property), under your state’s rules.
• If the seller kept the title (a contract for deed, also called a land contract, bond for deed or buying on contract), the CFPB warns that after a missed payment the seller often tries to start eviction right away, and might keep the money and work you put into the home.

If you think you will miss a payment, tell the seller before the due date, ask for any new arrangement in writing, and keep paying what you can. Then get advice: a housing counselor or an attorney can tell you what your state allows and what your rights are. The rules differ a great deal from state to state; check yours.

Lot rent, taxes, insurance and upkeep

The note payment is rarely the whole monthly cost. Owner-financed homes, especially mobile homes in a park, come with costs that keep going after the note is paid off.

• Lot rent and park rules. If the home sits in a park, ask the park for its rent, how often it has gone up, its rules, and whether you must apply and be approved before you move in. Get approval before you pay anything.
• Taxes. Ask who pays property taxes on the home (and the land, if it comes with it), and how much they were last year.
• Insurance. The note may require it. Get a quote before you sign.
• Upkeep and condition. Older homes need repairs: roof, plumbing, heating, skirting. Get an inspection, and set money aside every month.

Before you commit, check that the whole monthly cost fits comfortably. The leak check can find room in a tight budget by spotting interest, fees and subscriptions you are paying without meaning to.

Rent to own vs owner financing

With owner financing, you agree to buy now and pay the seller over time. With rent to own, you rent now and the owner agrees to sell to you later.

• Rent to own. The FTC describes it as a deal where the owner agrees to sell you the home in the future for a specific price, and the rent you pay now counts toward your future down payment. It warns you might pay upfront fees and higher monthly payments than if you were renting, that in some deals the deal is off if you miss a payment, and that at the end you might be locked into paying more than the home is worth, or be unable to get a mortgage to finish buying it.
• Owner financing. The sale is agreed at the start, the price and the terms are set in the note, and each payment cuts what you owe. Who holds the title until you finish depends on the paperwork, as above.

Whichever you are offered, the same questions apply: what is the total cost, who owns the home today, what happens after one missed payment, and what do you walk away with if it falls through.

When owner financing can be a reasonable path

Owner financing can be a sensible way to own a home when most of these are true:

• The total cost, worked out with every fee, is close enough to what a bank or credit union would charge that the convenience is worth it.
• The rate is fixed, there is no balloon, or there is one you have a real plan to pay.
• You can pay early without a penalty, so you can refinance later.
• The title is clear, the seller owes nothing on the property, and the papers will be recorded.
• The whole monthly cost, with lot rent, taxes, insurance and upkeep, fits your budget with room to spare.
• Someone on your side (an attorney or a housing counselor) has read the papers.

If several of these are missing, keep looking, keep saving, or ask for better terms. A seller who will not put the terms in writing, let you check the title or give you copies is telling you something.