Buying a House: Owner Financing vs. “Subject to” Financing

Owning a house is one of the best long term investments you can make, whether as a person looking for a home or as a real estate investor looking for properties to buy and sell. And the best way to buy real estate is by putting minimum investment from your side, minimizing risks and earning good returns.

Here are some ways of buying a house where you invest a minimum and still get good returns. Read on to know the pros and cons of each method.

Owner Financing:

In times when getting an affordable loan/ credits from banks seem like a distant dream, owner financing is the way to go. In fact, in 1970s and 1980s, owner financing was one of the most popular choice when buying homes as the interest rates were as high as 18%. So what exactly is owner financing?

In owner financing, the buyer gets a loan from the owner of the property, instead of banks. Both the buyer and seller agree on terms and complete a promissory note which has details like the interest rate, what will be the repayment schedule and consequences in case all the terms of the deal is not met from either side.


  • The amount you pay as a down payment is flexible as there is no need to meet the minimum down payment criteria which is set by most banks when giving out a loan. Buyer and seller can discuss and determine what the amount will be.
  • Reduced over head costs: The buyer is relieved of bank fees and broker commission. Moreover, there are some tax benefits.
  •  Quick Deal: Both, the seller and buyer look for a hassle free and quick deal. Informal owner financing saves months of time in the loan period and getting additional formalities.
  • It is a good option when you don’t want (or can’t) opt for the big loans.


  • Buyers have to pay a higher interest rate. But it can be subsidized by the benefits it offers over other methods.
  • Although you don’t need to get a loan approved by a bank, but you still have to build your credibility to win over the seller’s trust.
  • Buyer will need to make sure that the house he intends to purchase with help of owner financing is clear of all mortgages and debts.

“Subject to” Financing:  

“Subject to” financing is one of the best and quickest ways to buy a property. So what exactly it is? A ‘subject to’ property means that the property is not clear of the debts yet and hence, is still a subject to mortgages. Buying such property usually means that the buyer starts paying off the mortgage, instead of the seller and then this due amount is added to the down payment being offered by the buyer.


  • Quick closing of deal as there is no time consuming process, like applying and qualifying for loans, involved.
  • No need to qualify for loans and credits because as a buyer in the “subject to” purchase, you are not the one applying for loan.
  • Since the buyer is not directly in the loan documents, the mortgage payments do not show up in their credit report.
  • Low Interest Rates: Since the buyer has to pay the mortgage installments on the old interest rate, he can save a lot as the interest rates have gone up very sharply in the recent times.
  • No need to make huge down payments as the mortgage installments are added to the current down payment of buyer. Also, the buyer can even have flexible balance repayment method.


  • Due on Sale: According to this clause, if you try to sell your property before the complete payment, the seller or the lender will demand instant payment of the remaining amount and failing to do so will result in foreclosure of the property.
  •  As you will become the owner, don’t forget to include the repair and maintenance costs.
  • As a real estate investor, if you fail to put out the property for rent, you will have to pay complete 100% of the mortgage installments.

Each of these methods comes with their pros and cons, but as you can see above, the pros outnumber the cons.

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