I'll assume the main reason you're considering owner financing is because you may not qualify for traditional financing at this time, or that the institutional financing that you do qualify for is not enough to cover a purchase with the amount you have to put down (is this correct?)
The owner financing transactions I've done were not comprised of the owner financing the entire purchase, but a part of the purchase. Partial owner-financing is the type most owners are comfortable with (if they will consider it at all). Other owners may consider 100% financing (as used to be done in the old days) but that seems to occur now mainly in rural areas or for properties that are hard to institutionally finance (mobile homes on land, for example) or if the seller personally knows the buyers.
From my experience, a seller cannot offer owner financing on a property to another buyer while maintaining their current loan. As I buyer I would be wary of any deal structured under this strategy. When you sign a note with the seller for owner financing, the note is recorded with the county. I'm not certain how you would structure this (owner financing home for you while maintaining his current loan) and be kosher with most loan underwriting guidelines. In any case, the owner financing you receive while the seller maintains a separate home loan will be in second position after that first loan the seller owes to the bank. This means that while you might be making payments to the seller, the seller may stop paying the loan to the bank, and 12 months later after no pay, the bank will repossess the home without much care for your second position owner-financing and your claim to home ownership.
That said, the seller (as far as I'm familiar) must own the home outright prior to giving you seller-financing. This does not mean that they can't owe money on the home before you approach them. What this means is that whatever amount they owe, you must pay them for (through a home loan or cash) and that after that they may turn around and provide owner-financing to you. This paying off their loan and offering you seller financing would all happen at closing, in the escrow office. The paperwork for this would all be drawn prior to closing in preparation of closing.
Note that most institutional loans you may receive will impose limits on total loan-to-value, including owner-financing. So if you have a bank that says it will give you a 70% loan, but you must come up with cash for the rest, you cannot secure owner-financing as a way to come up with that last 30%. The bank will view owner financing as another loan. So the loan you receive must stipulate that you may receive secondary financing elsewhere (owner financing or second loan).
The alternative to owner financing is purchase-lease options. I've done these for buyers as well and basically it consists of a normal lease agreement with a purchase and sale contract and purchase lease option on the end of it. With these, you can stipulate a length of time the purchase-lease option will be good for. Usually, the buyer will "buy" the purchase lease option by putting up a some of money for the exhange (say, $2k-10k for the "purchase-lease option" which is viewed as an "asset" itself. Buying the option is not always required. Some sellers will happily set up buyers in purchase lease options without any compensation for the option. Lease options will build in a price increase for every coming year (ex: 6%, meaning a 100k house will cost you 106k should you choose to enact the option-to-buy one year from when you got the option). The time length (usually 1-3 years) ends at the end of the term, and if you did not purchase the property by then, you remain a tenant without future option to buy that property
(unless the seller wishes to extend the option). Lease-purchase options often allow for a part of the monthly rent to count toward your down-payment. On a lease purchase option, often the rent you pay will be higher competitively than similarly priced rental homes. This takes into consideration the amount of your rent that counts toward down-payment, or the extension of a lease-option to you from your landlord.
With the slower market, we're seeing more purchase-lease options on the market. However, they are still rare, as most sellers are unfamiliar with them, or do not have the equity in their homes to offer a worthwhile purchase lease option. Most sellers prefer to cash out, but the search is worth the effort if your heart is set on home ownership.
My recommendation: Focus on credit repair. Both purchase-lease options and seller financing involve time limits by which you have to cash the seller out (except in certain cases). If you've found the home but not fixed/built up your credit so that you can get traditonal financing at the end of the pre-agreed on term, you'll end up losing the home.