Seller financing, also called owner financing, is an arrangement in which the property seller lets the buyer pay part of the purchase price over time instead of getting all the financing from a bank.
The seller accepts a down payment, finances the remaining balance, and receives monthly payments under a mortgage note. In simple terms, the seller becomes the bank.
Suppose a property sells for $175,000.
The buyer agrees to put 10% down, or $17,500.
Instead of the buyer borrowing the remaining $157,500 from a traditional mortgage lender, the seller carries that balance.
The buyer signs a promissory note describing the debt and repayment terms. The debt is generally secured by the property through a mortgage, deed of trust, or another real estate security agreement depending on the state and transaction.
In this example, the note carries an 8.5% interest rate with payments calculated using a 360-month, or 30-year, amortization.
On a $157,500 balance at 8.5%, the principal-and-interest payment would be about $1,212 per month.
The seller and buyer might not want the note to remain outstanding for all 30 years. One possible structure is a seven-year balloon.
Using these terms, after seven years of scheduled payments the remaining balance would still be roughly $146,600. That amount would generally become due at the balloon date, assuming no extra principal payments or other changes.
A long amortization can keep the monthly payment lower while a shorter balloon date limits how long the seller expects to carry the financing. Balloon-payment rules vary by transaction. Federal rules that apply to certain seller-financed residential transactions can restrict the loan structure, and state law may add other requirements.
Seller financing should still be documented through a proper real estate closing. A title company, real estate attorney, loan originator, or other qualified professional may help prepare the documents, complete required disclosures, record the security instrument, and make sure the transaction follows applicable law.
| Traditional Financing | Seller Financing |
|---|---|
| A bank or mortgage lender provides the financing. | The property seller finances some or all of the balance. |
| The buyer makes loan payments to the lender or servicer. | The buyer makes payments to the seller or a loan servicer. |
| The lender holds the loan as an asset. | The seller holds a mortgage note as an asset. |
| The lender has remedies if the borrower defaults. | The seller may have remedies under the loan documents and applicable state law if the buyer defaults. |
Seller financing gives the parties flexibility, but the terms created at closing can affect both the buyer's payments and the mortgage note the seller holds afterward.
Certain seller-financed residential transactions are subject to federal rules. The CFPB has separate criteria for some sellers financing one property and those financing up to three properties in a 12-month period.
For example, the CFPB's three-property seller-financer criteria include a good-faith determination that the buyer has a reasonable ability to repay and require fully amortizing financing. The rules for a natural person, estate, or trust financing one property are different.
See CFPB Regulation Z Section 1026.36 for the federal requirements.
For more on reviewing the buyer, see How Much Can a Buyer Afford With Seller Financing? .
Seller-financed property sales may qualify for installment-sale tax treatment depending on the transaction. The IRS explains that an installment payment can include interest income, return of basis, and gain on the sale. Federal rules can also impute interest when an installment agreement provides too little stated interest.
See IRS Publication 537: Installment Sales. A CPA or tax professional can explain how the rules apply to a specific sale.
Once the property closes, the seller owns a mortgage note and begins collecting the scheduled payments.
From there, the note holder generally has three broad options:
The choice you made when you sold the property does not necessarily mean you have to collect every payment yourself for the next seven, ten, or thirty years.
See Can I Sell Part of My Mortgage Note? for an example of how a partial sale can work.
Already holding a seller-financed mortgage note? Alpine West Notes can show you what a full or partial sale may look like. There is no cost to find out what your note is worth, and there's no obligation to sell.
Yes. Seller financing and owner financing generally describe the same arrangement: the property seller finances some or all of the amount the buyer owes and receives payments over time.
The buyer typically makes a down payment, signs a promissory note for the financed balance, and makes scheduled principal and interest payments to the seller or loan servicer. The property secures the debt through a mortgage, deed of trust, or other applicable instrument.
Sometimes. A balloon makes the remaining balance due before the full amortization period ends. Whether a balloon is permitted depends on the transaction and applicable federal and state rules. Some federal seller-financer criteria require fully amortizing financing.
The seller may have remedies under the promissory note, mortgage or deed of trust, and applicable state law. The exact process varies by location and transaction, so legal guidance may be needed.
Yes. Depending on the note, you may be able to sell the entire remaining payment stream or only part of the future payments for cash.