The Disadvantages of Owner-Carried Mortgages

Financing your own mortgage comes with costs of its own. Images

Especially during a decade with a slow housing market, homeowners who need to move are tempted by any trick that makes their home faster and easier to sell. Offering to carry the mortgage yourself can speed the process by streamlining the approval of the loan. It makes the house easier to sell because you can be more lenient with credit terms. It can also get you a higher selling price by offering a lower interest rate along with it. These advantages don't come for free, however. They're accompanied by a variety of corresponding drawbacks.


Under nearly all mortgage agreements, you cannot owner-finance the sale of your home unless you own your house free and clear. Some homeowners set up a similar arrangement in which they rent out their homes and apply a portion of the rent toward the tenants' eventual purchase of the property, but that's a different arrangement and sometimes also forbidden by your home loan contract.

No Equity Cash Out

If you sell a home you own free and clear, you get a large lump-sum payment when the sale goes through. With an owner-financed mortgage, that only happens if you get a down payment from the buyer. Even the industry standard 20 percent down payment is only one fifth of what you would get with a bank-financed sale. This severely limits your options as compared to what you could do if you'd let a bank handle the mortgage.

Higher Risk

A bank-financed mortgage means you walk away from the house the moment the sale is complete. Mortgaging your own home means you still own it until the last payment clears. You are still responsible for taxes if the new owner misses payments. If the property is damaged in ways insurance doesn't cover, you're on the hook for the repairs. You may even be responsible for liability from a lawsuit that happens on the property.


As the mortgage holder, you'll be responsible for collecting payments and enforcing the loan contract. You will need to meet all recordkeeping requirements according to local and federal laws. If the buyer goes into delinquency or default, it's up to you to get him back on tract or foreclose on the loan. You can hire these tasks out to professionals, but that requires money that cuts into the proceeds you derived from the monthly mortgage payments.