How to Finance a Home by Owner

by Owen E. Richason IV ; Updated July 27, 2017
Sellers can hold financing for a buyer.

Items you will need

  • Comparable values
  • Financing terms

Homeowners wishing to sell their house and hold the financing (often referred to as seller financing or the owner “holding the note”) for a buyer can do so by setting financing terms like those found in a tradition mortgage note. A seller that offers owner financing will have to offer interest terms, down payment percentage, and installment terms (number of payments or number of years).

Step 1

Determine the value of the property. The market value of a home can be determined by comparing it to like homes with equal heated/climate controlled square footage, bedrooms, and bathrooms that have sold in the same neighborhood or similar neighborhood within the last three to six months and with comparable homes currently for sale.

Step 2

Set a down payment percentage. The appropriate down payment can be determined by the seller’s risk tolerance. The more the down payment, the less chance there is of the buyer defaulting, but in contrast, a down payment set too high will effectively price the home out of the market value as the down payment will be unaffordable.

A general rule of thumb for setting a down payment percentage is to accept a down payment of 20 to 25 percent of the agreed purchase price.

Step 3

Establish financing terms. Financing terms should be equitable to both the seller and buyer in that the interest rate for the owner carrying the mortgage makes the sale profitable and likewise gives the buyer a competitive financing rate outside of banks and credit unions.

Terms should include the interest rate, the mortgage term (number of years or number of payments), provisions for early pay-off, and provisions for buyer default.

Step 4

Set a closing date. Upon agreeing to the purchase price, request an earnest money deposit from the buyer to hold until the closing and the buyer has had time to have an inspection completed. Typically, closings are scheduled between 30 and 60 days from the time the buyer’s offer is accepted by the seller.

Contact your local title company and provide them with all the information about the home sale and the particulars of the owner financing.

Warnings

  • Owners with a remaining mortgage balance must pay off said balance when selling their home; this is known as a “Due on sale” clause in mortgage contracts.

About the Author

Owen Richason grew up working in his family's small contracting business. He later became an outplacement consultant, then a retail business consultant. Richason is a former personal finance and business writer for "Tampa Bay Business and Financier." He now writes for various publications, websites and blogs.

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