If you’ve sold very much real estate, either as a real estate agent representing a seller or an individual property owner, at some point you’ve likely been approached by a buyer with an offer and ask owner financing real estateyou to finance the purchase, either all or in part.

This is called “seller” or “owner financing.” When asked, should you? And if you decide to go ahead and be a lender, what should you watch out for?

Whether or not to finance a purchase is first a question of your own liquidity. Can you afford to finance a purchase instead of cashing out at the settlement table? When you finance a property, you’re guaranteed a rate of return that’s hard to duplicate in today’s market. Just compare an interest rate of say 8.00 percent with any mutual fund over the past five years. If you’re in a position to carry the note and the returns intrigue you, then you need to think like a bank thinks when considering financing your home.

Credit. Past payment patterns of a buyer is an indicator of how you will be paid in the future. There are several online credit reporting agencies that allow you to independently pull a credit report on an applicant as long as you have the buyer’s authorization. Recent late payments or collection accounts are a warning sign. You also want to check the buyer’s rental history by contacting their current landlord or reviewing 12 months’ worth of cancelled rent checks showing timely payment. Don’t finance someone with marginal credit. Foreclosing on a mortgage is a time consuming, expensive process.

Income. Verify the buyer’s ability to pay by reviewing the buyer’s recent paycheck stubs. You want to see both a gross monthly amount as well as a year to date amount that coincides with regular payments. Ask to review income tax returns and match those amounts with the information on the pay check. Mortgage payments, including a monthly property tax and insurance amount, should be no more than one-third of the buyer’s gross monthly income. Contact their employer to verify the borrower is currently employed and make sure the buyer has at least two years’ employment history.

Down Payment. You should ask for a minimum 20 percent down with 30 percent your target. Verify the buyer’s have their own funds to cover the down payment by examining their bank or investment statements showing sufficient funds to close.

Interest Rate. Buyers who require owner financing typically can’t get a mortgage from a traditional bank. That means you should charge a higher interest rate than what is currently available on the open market. If current mortgage rates are 4.50 percent, then 7.5 to 10.00 percent seems fair. Different areas have usury laws that can limit what you can charge so make sure you’re aware of guidelines in your area.

Term. You can amortize your loan over any period you want, the longer the term then the lower the monthly payment and the more interest you will receive over time. However, you should construct your loan as a “balloon” note, that requires the loan be paid in full after a predetermined period of time, say five or seven years.

Legal. Unless you’re a real estate attorney, don’t go about this alone. Work closely with an experienced real estate attorney to make sure there are no legal missteps.

If you want to finance your own property for others, it’s a way to get greater returns on your money while still having the note secured by your home. Just make sure you’re prepared and surround yourself with professionals who can help make sure both the buyer and you come out a winner.