Owner financing, also known as seller financing, lets buyers pay for a new home without relying on a mortgage. When shopping for a new home, owner financing can be helpful for those struggling to get pre-approved for a new home loan.
In owner financing, the homeowner (seller) finances the purchase, often at an interest rate higher than current mortgage rates. Additionally, the seller would add a balloon payment, due after at least five years. In turn, this eliminates the need for a lender, appraisal, and inspection. However, some may be curious about where the deed goes when owner financing.
Who Holds the Deed in Owner Financing?
In owner financing, the question of who holds the deed is a bit complicated. If you are the buyer of the house, you do own it, however, you are still in debt to the original owner (seller) of the home. The buyer holds an “equitable” title, while the seller holds legal title.
If you sign a “deed of trust,” promising to pay off the loan on the home, you will receive the deed once the debt is paid off. While not technically owning the physical “deed” yet, you still own the home through the “deed of trust.” Because the seller keeps the title over the life of the loan, you cannot sell or refinance the property until all payments are made and the title is transferred.
In addition, the seller can also sign a deal with the buyer to “take back” a mortgage on the house. The buyer will sign both a promissory note (promising to repay the loan) and either a mortgage or a deed of trust (allowing the seller to foreclose if the buyer fails to pay). In return, the seller signs a deed transferring the title to the buyer.