How to Calculate a Mortgage for Owner Financing

Owner financing is an alternative to a traditional mortgage that has helped many purchase their homes. While the process can be complicated and some sellers might not be able or willing to participate, resources such as owner finance calculators and guides are available to help those who are interested.

According to the Consumer Financial Protection Bureau (CFPB), owner financing (also known as seller financing) is a loan made by the seller of the home to the buyer instead of from a traditional lender, such as a bank. Typically, owner financing is used in place of a traditional mortgage when the buyer doesn't qualify for a bank loan or when the buyer is assuming a part of the seller's mortgage and needs a loan for the rest. When taking part in owner financing, the buyer must disclose any additional financing they may receive.

Buyers should make sure to protect themselves so they don't overpay for the home just because the seller is providing financing. To ensure this does not happen, buyers should have an independent professional conduct an appraisal to gauge the home's value.

While owner financing can be faster and easier than getting approved for a government-backed mortgage, it tends to be more expensive. Unlike a traditional mortgage where the buyer can have ​15 to 30 years​ to pay back the loan, owner financing tends to have a much shorter timeline. Many owner financing deals require repayment in five years; however, this timeframe will vary case by case.

To make an owner financing deal, the buyer and seller must agree upon the mortgage terms, monthly payments and an amortization schedule. Some deals may include a lump-sum payment at the end of the term. The buyer will still be responsible for making tax and insurance payments. By the end of the term, buyers can either make a balloon payment and pay off the rest of the loan or refinance by paying off the seller with a new loan – whichever was agreed upon by both parties. Once the loan is paid off, the seller can either issue the property title or execute a Satisfaction of Mortgage and release the lien on the property, depending on the terms established.

A mortgage is a loan borrowed to purchase a home and must be paid back through monthly payments. Despite not taking the traditional mortgage route, you will still need to calculate the mortgage based on the loan amount, term length and amortization schedule.

A mortgage guide made by the CFPB is available online to assist with the process. It walks buyers through loan terms, interest rate types, adjustable-rate mortgages, loan types and mortgage insurance. However, if you're looking for a seller financing calculator that will do the math and determine monthly payments, many are available online. If you're calculating the loan by hand, to determine the loan amount, subtract the down payment, earnest money and any other upfront payment from the purchase price.

With the loan amount established, determine the interest rate. Generally, interest rates are higher in owner-financed deals than traditional mortgages; however, they can be negotiated between the buyer and seller. Then, determine the amortization schedule and loan term, detailing the number of monthly payments, the amount of each payment, due dates, late payment criteria and grace periods.