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Types of Owner Financing

In an owner-financing agreement, sellers and buyers are free to negotiate the terms of the owner financing, subject to usury laws and other state-specific regulations. And even though there is no specific down payment required, most sellers will ask for an amount that is sufficient enough to protect their equity. Down payments in these arrangements can be as low as 3-5 %.

Some variations of owner financing include:

Land Contracts.
Land contracts do not pass legal title to the buyer, but give the buyer equitable title. The buyer makes payments to the seller for a certain period. Upon final payment or a refinance, the buyer receives the deed.

Promissory Notes and Mortgages.
Sellers can carry the mortgage for the entire balance of the purchase price (less the down payment), which may include an underlying loan. This type of financing is called an "all-inclusive mortgage" or "all-inclusive trust deed" (AITD). The seller receives an override of interest on the underlying loan. A seller may also carry a junior mortgage, in which case, the buyer would take title subject to the existing loan or obtain a new first mortgage. The buyer receives a deed and gives the seller a second mortgage for the balance of the purchase price, less the down payment and first mortgage amount.

Rent to Own/Lease Purchase Agreements.
Selling on a lease purchase agreement means the seller is giving the buyer equitable title and leasing the property to the buyer. Upon fulfillment of the lease purchase agreement, the buyer receives title and typically obtains a loan to pay the seller, after receiving credit for all or part of the rental payments toward the purchase price.

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