Can Sellers Offer Owner Financing if they Have a Mortgage?

Owner Financing

Owner financing is a form of lending in which the owner of a house offers to create the mortgage for the potential buyer. Essentially this leads to the house being paid for directly through the mortgage payments, which the buyer makes to the seller each month with terms similar to a conventional mortgage. The seller benefits from the money earned through interest over time, while the buyer benefits from a unique loan that will often work when normal lending applications have failed. The seller can make this arrangement with a previous mortgage still attached to the house.

The primary requirement for owner financing with an existing mortgage in play is the acquiescence of the lender involved. The lender must approve of an owner financing deal before it can move forward. Lenders usually only agree to allow such financing if the buyer has a very strong credit history and the mortgage market is strong.

In the past, a number of mortgages were assumable, which meant that a buyer could rely partially on owner financing and the mortgage could simply be moved to the borrower's name. Assumable mortgages are rare in modern markets because they make it difficult to manage risk. Although it may seem like an attractive option, sellers should note that very few lenders allow mortgages to be assumed, preferring to create entirely new loans.

Several other options are available for sellers who have a mortgage but still want to offer owner financing. For example, a lease option where the buyer can rent the property with an option to purchase the home in the future may work around the presence of a mortgage. Sharing ownership is another strategy.