'Owner Financing' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Owner Financing refers to the seller carrying all or part of the house sale purchase price. The exception is the amount which the buyer offers by way of down payment. The seller provides the actual financing in this type of a home sale transaction. It is not important if the property already carried a loan when the transaction occurred.
There is always the possibility that the existing lender might find out about the sale and accelerate the loan on the sale utilizing an existing alienation clause contained in the original mortgage contract. Rather than the buyer going to a bank for the purchase price money, the buyer provides their financing instrument to the selling party as proof of the loan. They then make their payments directly to the home seller.
If the property turns out to be unencumbered by an existing loan, then the seller possesses a free and clear title that does not have any current loans. This would permit the seller to freely consent to carrying the entire financing directly with the buyer in this case. In such a scenario, the seller and buyer negotiate and directly settle on an interest rate, term of the loan, and monthly payment amount. The buyer will then pay the seller for the equity in the form of installment payments each month.
Next the security instrument will be recorded within the appropriate public records. This safeguards the interests of the two parties in the transaction. There are states and state regulations which outlaw balloon payment arrangements. It is also important to keep in mind that there are similarly federal government legislations that may govern types of owner-provided financing. This is why it is advisable to seek out legal counsel in order to properly follow the letter of the law in such a transaction and owner arranged financing.
Such purchase types of transactions are freely negotiable. Buyers and seller have the right to come up with their own mutually agreed on methods of financing, assuming that usury laws are not violated nor any other kinds of state- or federal-applicable regulations. The truth is that there is no set amount of down payment mandated in such a private party arrangement. The majority of sellers will want to obtain at least a significant down payment in order to protect their equity in the property though. These might range from next to nothing to as high as even over 30 percent of the total sale price. This safeguards their equity as the buyer is far less likely to walk away from a property into which they have poured even tens of thousands of dollars of their own hard-earned money.
There are a number of variations on the idea of Owner Financing. Promissory Notes allow for the seller to continue carrying their mortgage for the remainder of the loan term on the mortgage. This could be for the whole balance minus the down payment. Such a financing arrangement is known as an all-inclusive mortgage or alternatively as an AITD all-inclusive trust deed.
Land contracts happen when the buyer obtains equitable title but not legal title to the property in question. The buyer still gives payments to the seller for a preset amount of time. Once the last payment is made or a refinance is secured, the buyer receives the actual deed.
Lease Purchase Agreements are another type of Owner Financing. When a seller engages in a sale using a lease purchase agreement this signifies that the seller is providing the buyer with an equitable title and leasing out the property to the purchaser. Once the lease purchase agreement has been completely fulfilled, the buyer gets the title as well as a loan with which to pay the seller. The buyer would obtain credit for part or all of the rental payments which they made toward the contracted purchase price.