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Essential details you shouldn’t forget to include when drafting your owner-financed contract

Owner financing — where a seller acts as the bank and allows a buyer to make payments for a number of years before they’re obligated to convert to a traditional mortgage –on a real estate deal isn’t uncommon. Sometimes long-term tenants want to buy a property but lack the credit for a loan or the capital for the down payment. Other times, someone may have plenty of capital but not enough work history to qualify for a loan. 

Owner financing can help in both those situations — and it can help a seller unload a property quickly — but such agreements need to be handled very carefully.

Details most every owner-finance agreement must contain

There are essential components an owner financing agreement needs to have, including: 

  • A description of the property being financed
  • A specific statement of the loan amount and payment terms
  • Details about the interest rate the buyer is paying
  • Information about insurance, tax obligations, late fees and penalties for nonpayment
  • Details about who is responsible for home repairs and maintenance

Any owner-financed contract that you enter into should also clearly spell out how long the buyer has to convert the sale to a traditional mortgage and what happens if they fail to do so.

Ensuring that the contract is enforceable

It is crucial when offering seller financing that one has an airtight and enforceable contract. It may be more challenging evicting someone from your home than it was getting them into the house. You could lose your home in an adverse possession claim without a legally enforceable contract in place. 

Purchase agreements should always protect the rights of both buyers and sellers. They should address any potential disputes that may arise down the road. Resorting to boilerplate contracts that you find online could leave you legally exposed. Buyers and sellers alike should make sure they have a strong, valid contract for the house sale.