First, check the buyers credit and references.
Since you are not a bank, the interest should be higher than market.
The buyers down payment should be substantial (20-30%).
Sell the property on a "Contract for Deed".
Don't carry the note for more than 5 years, the buyer should be able to get regular financing after that.
Hire a RE attorney!!!

Thanks for your reply berniek. That all sounds reasonable. I guess we'll see what happens - they might not even make an offer - you never know.

I don't see how it's a good idea. Let's say on average you are paying 7% on your other mortgages. How high would the interest rate have to be for you to be making money on the deal AND for it to be worth the hassle factor? And why does someone who has such a large down payment not qualify for a mortgage?

Personally I'd take a clue from the mortgage market meltdown and not take on a bad credit risk when the banks aren't willing to take them on either.

Also something to look into would be any tax consequences of doing this.

If they have a "sizable" down payment, why do they need you to finance? That tells me mortgage companies wont touch them.

"pay off our current house with a mortgage of 6.65% on one loan & 7.25% on the other"

You'd have to charge them a rate that is at least 7.25% PLUS the odds that they will default just to break even. If these people have the money for a sizeable downpayment they ought to be able to get their own financing at a better rate than whatever you should be able to offer.

Those were my initial thoughts too - why do they need us? I'm not comfortable with being a bank + in my opinion it's better to just be done with it. Plus I am sooooo looking forward to paying our house off. I imagine that would feel pretty darn good and it's really the only reason to sell it. Otherwise, we could rent it (which I REALLY hate).

Thanks all for your insights - now I have backup!

I knew of only two instances of owner financing: My college roommate's dad bought their house that way 40 -odd years ago, on a lease-to-own arrangement.

The only other was a man and his wife who collectively didn't have the common sense of a rock: tried to convinse a seller to finance the sale - and they expected a lower rate from the seller than the bank would give them. If a bank, with all it's resources, doesn't see them as a good risk, what makes you better qualified to take the risk?

Update. Met with the guy. He says he wants to pay almost 1/2 down. DH asked why, if he was able to do that, wouldn't he just get a loan for the rest because even if we did finance it, it would be for a lot higher rate than he could get elsewhere. Said he'd had a couple of "charge backs" that might prevent him from getting a loan. No idea what that means - but it did cement our already made up minds not to owner finance. We gave him the name of our banker if he wanted to go that route. I know if he qualifies, they'll give him the money - they originally financed it for us & know the property well.

Here is some additional info. Please consult your Tax & Legal adviser.

Here is a link that might be useful: Tax Benefits of Seller-Carry Financing

The big question is what else can you do with the money that has a higher yield than holding the mortgage?
Paying off a mortgage is often NOT a wise financial move.

After taxes you can often get more than the cost of the mortgage. and there are few things worse than being house poor.
Your ability to borrow against the property is based on your income (unless you get a reverse mortgage and give up the property when you die).

I have held a couple of time for various periods.
Only once was I forced to foreclose and sell the place for an even higher price.

Holding a mortgage is almost always a solid investment.