How does owner financing work?
When a person wants to buy a home, they typically go to a bank or credit union and get a mortgage to purchase the home. Qualifying for a conventional mortgage requires having excellent credit, proof of income and meeting many other requirements for the bank. An alternative to this conventional mortgage process is owner financing.
Owner financing is when the owner of a home acts as a bank and allows the person buying the home to make payments directly to them. There are two different ways that an owner can financing a home for a buyer.
The first option for owner financing is using a deed of trust or trust deed. This is also what a bank or credit union will use if you get a mortgage from them. With this type of financing, the seller transfers legal title to the buyer with a deed. If the buyer doesn't make the agreed upon payments to the seller, then the seller can foreclose on the house to regain ownership or recover their money. In order for a seller to offer owner financing using a trust deed or deed of trust, they have to own the home free and clear.
The second option for owner financing is using a contract for deed, land contract or agreement for deed. All of these terms are used to refer the same thing. This is the easiest and most common type of owner financing between buyers and sellers. The biggest difference between this type and the deed of trust type described above is that the deed, or title to the home, is not transferred to the buyer until all the payments are made or the contract is fulfilled. This is why its called a contract for deed. This type of owner financing can be used even if the seller has a mortgage on the home.