Owner financing - everything there is to know

by Theresa Hus Content Writer for RealEstateAgent.com

If you want to purchase a property, you have probably seen/heard the letters OWC or SWC. If you have been wondering what they mean, it’s simple: OWC stands for “owner will carry,” and SWC means “seller will carry.” Both are synonyms for owner financing. Owner financing is a financial agreement between a home seller and a home buyer. It works similarly to a regular loan but is not precisely the same. In this article, we will uncover all the details about owner financing. We are also going to take a look at the advantages and disadvantages that may come with owner financing. Curious? Read on!

What's owner financing?

To put it very simply, owner financing is a kind of financing agreement between the owner of a property and the buyer. It replaces a traditional mortgage, leaving the bank out of the equation, so the loan repayment is between the owner and the buyer directly. Even though there’s no bank involved, owner financing works similarly to any bank loan. The difference is that the seller finances the purchase, and the buyer pays the seller back according to the terms of their agreement.

The owner and the buyer decide upon the terms and conditions of the financing and the facilitation of payment. The process usually begins with a substantial down payment of 10-15%. Monthly loan repayments plus interest are due after that. Owner financing regularly takes the form of a balloon loan. This involves a contract of 5-10 years and a single large payment at the end of the term to complete the purchase.

Replacing a mortgage

Owner financing makes it possible for the buyer to purchase real estate without having to take a mortgage from a bank or lender. That’s why owner financing can become the choice of a buyer who cannot get a mortgage. That can be due to the buyer’s credit history or the property's condition.

Owner financing can end up being more expensive than a traditional loan from an institution. Still, it can be a walkable path for buyers who cannot acquire financing through a lending institution.

The installment payments are paid directly to the seller, based on the agreement between the owner and the buyer. The buyer can complete the purchase if they can secure a mortgage. Until then, monthly payments are required to pay off the debt. The owner sometimes keeps the title to the house until the debt is paid off by the buyer.

Like any other loan, owner financing requires legal paperwork, too. The paperwork is mandatory and protects both parties involved. There’s no restriction on what kind of property can be purchased with owner financing. It can be anything from raw land to homes to commercial real estate.

Partial owner financing?

Yes, that’s possible. If you can’t get a mortgage on the full price of the real estate, you can get a partial mortgage and complete it with an owner-financed second loan with the lender's approval. It might be important to get an appraisal on the home to ensure that the property is not overpriced. Combined loans can end up being very expensive.

Balloon payment

The advantage of owner financing is that the loan can be paid off in a much shorter term than usual mortgages. Regularly, the loan is amortized over 30 years, making the monthly payments low. Then, there’s a final balloon payment after 5-10 years, which is a larger payment and finalizes the transaction. So, if the buyer doesn't qualify for a traditional mortgage at the present moment, they can still purchase a home and improve their financial situation in the upcoming years. This either makes it possible for them to pay the balloon payment entirely or after a few years, they might qualify to get a loan and complete their payment that way.

The four types of owner financing

Owner financing can take the following forms:

Mortgages. This can be a second mortgage, as mentioned before, to make up the difference in the full purchase price of a home. Typically owner-financed mortgage has a shorter term and higher interest rate than traditional mortgage.

Wrap-around mortgage. Commonly known as a wrap, this is a type of secondary financing where the seller extends to the buyer a mortgage that wraps around and exists simultaneously with the “master” mortgage already secured by the property.

Land contract. This owner financing enables buyers to get the deed to the property when the payment schedule is finished. A land contract usually doesn’t involve a bank or a lender, so it can be a faster way to secure financing. Missing a payment, however, can lead to foreclosure in many states.

Lease-purchase agreement. Otherwise known as the ren-to-own agreement, this modality allows the seller to lease a home to the buyer, providing the equitable title. The buyer gets the title upon fulfilling the lease-purchase agreement terms without entering into a standard credit contract.

Advantages and disadvantages of owner financing

For both buyers and sellers, owner financing can have advantages and disadvantages. It’s important to consider them before entering an agreement.

Advantages

For the buyer, owner financing is the best way to get financing if a traditional mortgage is not an option at the moment. For the seller, this makes it easier and faster to sell a property on a busy market.

There’s no standard minimum down payment. You don’t have to respect government or bank-imposed minimums, meaning that the buyer and the seller can negotiate the amount of the down payment. A lower down payment can benefit the buyer, while a higher down payment can benefit the seller.

Closing benefits. Those include lower costs for both buyer and seller by cutting down on inspection, appraisal, and bank fees. The closing also goes faster because you don't have to wait on the approval of the loan officer, underwriter, or legal department, making the process much quicker.

Disadvantages

Mortgage complications. If the owner already has a mortgage on the home when the new buyer enters the picture, there might be complications. If the owner relies on the buyer to pay the mortgage payments and the buyer fails to do so, the bank has the right to foreclose, putting everyone in an uncomfortable position.

Higher risks. The shorter terms come with higher risks. The owner and the buyer are risking the incompletion of the significant balloon payment.

Repair costs. Because of the seller’s advantage of selling a home as it is, the buyer can face significant repair costs. If, for any reason, the house gets back to the seller, then the seller has the same responsibilities, depending on how well the buyer took care of the property.

Conclusion

The alternative path of owner financing can be a good solution for both buyer and seller. It can make dreams come true, even when other options are unavailable. It can come with great benefits, but it can also be a high-risk solution. Thorough research on your specific case can help to avoid foreclosure and losing money. Every case is different, so to make sure it’s the right choice, it’s advised to learn about it in detail before signing an agreement.