Some FSBO sellers offer owner financing (also called seller financing) as a way to speed up the sale of the house. But before you offer owner financing in your listing, you need to understand its advantages and disadvantages, when it can be a good idea, and exactly what the risks are.

It is safe to say that anyone offering owner financing should have a competent, experienced attorney to draft the financing papers so that your rights are protected and the wording is as airtight as possible.

Advantage of Seller Financing: More Potential Buyers

When you offer owner financing, it doesn't mean the buyer will necessarily want it. Many buyers prefer to stick with traditional mortgage lenders because their interest rates are often lower.

However, there may be buyers who are forced to opt for owner financing because they believe they will not qualify for a traditional mortgage. Thus, offering owner financing can increase the number of home buyers who want to view your FSBO house, or who may feel comfortable making an offer.

Disadvantage: Higher Risk Buyers, Less Cash Up Front

Home buyers in the market for owner financing are often those who don't think they will qualify for a mortgage from a bank. They may know they only qualify for a smaller mortgage, or they may have had credit problems that hurt their chances of getting a mortgage. When you offer owner financing, you take on the risk that that buyer will default on the loan.

Furthermore, rather than getting the lump sum you would receive from a buyer's mortgage lender, you would only receive the down payment up front and the rest of the money would be paid monthly (with interest, of course). Many sellers want or need that lump sum to pay off an existing mortgage or to put toward a new house.

In addition, any FSBO seller offering owner financing must be absolutely sure about the risks, the tax implications, and how long they will be in a financial relationship with the buyer. Many homeowners conclude that offering owner financing is simply not worth the time and trouble.

When Owner Financing May Work

• If you own your home outright: Owners who own their home free and clear are better candidates for offering owner financing because they may not need the lump sum they would receive from a lender when the buyer obtains a traditional mortgage.
• If you only have a small balance on your mortgage: Owners who only owe a small percentage of the value of their home may also be good candidates for offering owner financing.

Words of Advice

Be aware that extending owner financing to buyers with shaky credit puts you at risk. If the owner defaults, you are financially harmed rather than a mortgage lender. Before even considering offering owner financing, speak with an attorney who is well-versed in the subject and learn what all your risks are.

The financing papers must be drawn up so that they protect you as much as possible. Setting up owner financing is no job for a do-it-yourselfer (unless you happen to be an attorney with expertise on the topic).

The bottom line is this: offering owner financing will open up your home to more potential buyers, but many of those potential buyers may present unacceptable risks to you as the seller.