When buying a home the standard practice is to either pay cash (if you have that much money), or most commonly find financing from a lender. But for special circumstances there are other more creative ways of financing a home purchase. One such way that is often mentioned is “owner financed”, but what exactly does that mean?

Here is what the standard definition is. Owner financing means that the person who sells the real estate agrees to take payment over time for the purchase price of that real estate. For example, if you buy a house from a seller and the seller agrees that you can pay $1,000 per month over 30 years, this would be owner financing, also called seller financing. Owner financing arrangements are contractual agreements, which means the details can vary depending on the circumstances of each transaction. An owner financing agreement therefore is whatever the purchaser and seller agree to the time of sale. The terms generally include a purchase price, an interest rate and a schedule of payments.

Of course this is not a standard practice and there are some risks involved for both the seller and buyer. If you are considering purchasing property on owner financing, you should be aware that most owner financing agreements will include a provision which states that if the borrower is ever late on a single payment, then the borrower loses his entire equity in the house,. For example, if you make 12 payments on time and build up $2,000 in equity, but then make one late payment, then you lose all $2,000 of equity. You can negotiate out of this type of an arrangement, but you need to work out the terms before you sign any contracts.

One risk for the seller is that there is a reason the buyer is going this route. Obviously the buyer is having trouble securing a lone form a reputable lender and therefore is looking for alternative means of financing. If the seller is willing to assume the risk of loaning money to a borrower that was deemed to risky for a normal lender then owner financed may be an option.