If you’re considering buying a home, you may have noticed that things have gotten a little tougher lately. With inflation scaring politicians and economists, the Federal Reserve raised interest rates by 0.75% this month, and while that may not seem like much, it has had a huge impact on the mortgage market. Interest rates on home loans have reached their highest level in more than a decade.

And grant the loan is one thing. Qualifying is another.. Whether your credit score is in shambles after three exciting years of the pandemic, you’re up to date on all your debts but have too many, or you don’t have enough money in the bank, you’re going to have a hard time qualifying for a mortgage. Simply put, buying your dream home just got a whole lot harder. Luckily, even if you’re struggling to qualify for a mortgage or if current rates make you dizzy, you don’t have to commit to renting or living in your current home for the foreseeable future yet. Owner financing could be a way forward without a mortgage, but only if the circumstances allow it.

FTW Land Contracts

Owner financing (sometimes called seller financing) is basically a simple concept: you enter into what is called a “land contract” or a “deed of sale contract”. The owner of the house you want to buy agrees to let you pay for the house over time. You give them your down payment, you both enter into a contract giving you “equitable title” to the property (meaning you have a share of ownership), and you make monthly payments for a few years. Typically, these arrangements are short-term: after five or, at most, ten years, you’ll need to make one final (huge) payment to complete the sale.

The idea is that every month you earn a little more equity in the property so after about five years you can go back to the banks and get that mortgage, at which point you pay off the balance owing and the house is yours . Often the seller will retain title to the house until you make that final payment, so they (usually) technically remain the owner of the property while you live there.

Benefits of owner financing

The advantages of owner financing for a buyer are quite clear:

• The rapidity. Because this is a contract between two individuals, it won’t take months of unnecessary faxing of documents to different numbers to close the sale.
• Reduced closing costs. There are no bank charges or other costs associated with a mortgage-backed sale.
• Flexibility. The landlord may not care how much you can deposit and may be flexible about how much you are expected to pay each month. In fact, every aspect of the agreement is flexible, so it can be customized to meet the needs of both parties quite easily.

For the seller, the benefits also include selling the house as is. Jthe buyer can always interrogate for an inspection or expertise, of course, but the seller’s motivation to accept these conditions may be down. Seller benefits also include the ability to sell the debt for a lump sum and security – if the buyer fails to make the payments, they can keep the house and down payment, then sell the house Again.

Risks for owner financing

Keep in mind that the owner of the property may still perform a credit check and may decide not to sell to you for any reason. And that’s assuming they’re into the idea in the first place.

There are also risks for the buyer:

• The higher rates. You often have to pay a higher interest rate on these offers. On the other hand, since these arrangements are short-term, you’ll likely pay less interest overall.
• Possible foreclosure. If the seller holds a mortgage on the property, the bank may have the ability – and the desire – to seize if the property is sold. You should not attempt to enter into a financing agreement with the owner unless the seller owns the property frankly and clearly.
• This lump sum payment. Most mortgages have terms of 15 or 30 years, which means that the payments are stable. The only adjustments that will be made will involve escrow fees for your property taxes and insurance payments – the actual mortgage payment will be the same month after month. But with seller financing, there’s almost always a lump sum payment after just a few years, so you have to be prepared to cover that. If you’re planning on getting a mortgage in 10 years and it fails, you could end up with nothing.
• legalese. An owner-financed agreement is a legal contract, so always, always hire a lawyer when entering one. As simple as it sounds, you need expert legal advice before signing.

For the seller, the main risk is that the the buyer stops making payments and then either refuses to vacate the property or leaves it damaged and in need of costly repairs.

Search for proprietary financing

All of tThat being said, owner financing is not exactly a common arrangement. There are several ways to try to identify owner financing opportunities:

• Interrogate. If there is a specific home you wish to purchase, it is always worth simply contacting the seller and asking if they would be willing to explore such an arrangement. Alternatively, if you’re renting a home or seeing homes for rent that fit your criteria, asking about an owner-financed purchase might find the owner receptive.
• Real estate applications. Real estate apps and search engines like Trulia or Redfin usually allow you to add owner financing as a variable in your searches.
• Real estate agents. Local real estate professionals may know of real estate owners who are looking for or are open to these types of sales. Making a few phone calls might do the trick.
• FSBO. People listing their home as “For Sale by Owner” might be more open to owner financing, as they are already looking to dodge realtor fees and handle things on their own.

One final note: Since owner-financed agreements are contracts, just about every aspect of the sale can be negotiated. Don’t make any assumptions and make Make sure your attorney knows your needs and wants when reviewing an agreement. To finish, be sure you understand every detail before you sign.

Owner financing is not a typical way to buy a home, but it is one more option. If you’ve explored traditional mortgages and failed, this might be your way to go.