Can I Owner-Finance My House When There Is a Lien Against It?

Owner financing, highly popular in the 1980s because of mortgage rates that reached 18 percent, has made a comeback. When you have an outstanding mortgage or other lien, owner financing becomes more complex, but you can still do it. The most common options are to offer lease-to-buy, sometimes called rent-to-own, programs; installment land contracts, very popular in the 1970s and 1980s; or "wrap-around" mortgages. Understand and evaluate the risks with owner financing to better protect yourself.

TL;DR (Too Long; Didn't Read)

Depending on the laws in your state, you may be able to owner-finance your house even if there's a lien on it with options that include owner financing, lease options or a wrap-around mortgage.

Owner Financing the Sale

If there is a lien on your home that you can't satisfy when the sale closes, the buyer may have trouble finding a mortgage lender to work around the lien. To close the deal, you may have to front the money yourself. Owner financing is a serious business deal, so treat it as such. Get help from an attorney to draft proper legal agreements to protect your interests.

Most of the risk of owner financing falls on you, the lender, because you are signing away the deed to your home and lending money that is second in line to the outstanding lien should the deal go south. Even if you have a very tight budget or are desperate to sell your home, do not cut corners to save money. Using an escrow company or real estate attorney to orchestrate and manage your agreement will minimize your risk. Your attorney and real estate agent should help you find the most qualified buyer available.

Lease with Purchase Option

If you cannot find a qualified buyer, lease options may work. You rent (lease) your home to a potential homeowner who has the option, but not the obligation, to buy the property at an agreed-upon price at the end of the lease.

When interested buyers need more time to save up a down payment or fix credit problems, this owner financing plan can work even if you have a lien or mortgage recorded against your home. However, it has an expiration date. The eventual sale, should the tenant exercise the purchase option, will be a traditional sale that requires you to satisfy all liens.

Wrap-Around Mortgage Option

Although no longer permitted in some states, wrap-around mortgages can allow homeowners to sell their properties without satisfying an underlying lien. There are risks to both sellers and buyers. Purchasers make monthly payments to homeowners, who must continue to make their own mortgage payments.

Since most mortgages include a "due on sale" clause, which means the loan must be paid off when the property is sold, a wrap-around mortgage is risky for both buyer and seller. If the lender learns of the sale, they may call the mortgage due immediately. If your state permits wrap-around mortgages, you can owner finance until your buyer finds a mortgage loan in his own name.

Installment Land Contract

The riskiest type of owner financing, an installment land contract technically solves the "due on sale" problem, as you do not transfer title to your home to the buyer for an agreed-upon time period. You only transfer title to the home when your buyer makes the final monthly payment to you per the agreement term. However, risks include the buyer missing monthly payments, after which you must make your mortgage payment with your own money, and interest rate increases that may prevent your buyer from getting a permanent mortgage to complete the sale.

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