What is seller financing?

The seller acts as the bank. The buyer pays some cash at closing and pays the rest of the price to the seller in monthly payments, under a promissory note secured by the property.

What interest rate is normal for seller financing?

There's no set rate. Buyer and seller agree on it. It's often near or a little above bank mortgage rates, because the seller takes more risk and the buyer gets easier approval.

Why would a seller offer owner financing?

To sell faster or to buyers banks won't approve, to earn interest instead of letting cash sit, and sometimes to spread the tax on the gain over several years (an installment sale). Ask a tax advisor about your case.

What happens if the buyer stops paying?

The seller can usually foreclose under the mortgage or deed of trust and take the property back. The steps and timing depend on the state, so this is a question for an attorney.

Can the seller still have a mortgage?

Sometimes, but it's risky. Most mortgages have a due-on-sale clause, so the seller's lender can demand the full balance after a sale. A deal that keeps the old loan in place is often called a wraparound.

Do federal lending rules apply to seller financing?

They can when the buyer will live in the home. The Dodd-Frank Act and the SAFE Act set limits on things like balloons and how many homes a seller finances, and some sellers must use a licensed loan originator. An attorney can tell you what applies to your deal.

Seller financing calculator

When the seller acts as the bank, see what the buyer pays each month, when a balloon comes due, and what the seller earns.

What this answers: If the seller acts as the bank, what will the buyer pay each month, and what will the seller earn?

How this deal works: Instead of a bank, the seller lends the buyer most of the price. The buyer pays some cash up front, then pays the seller every month, and often owes the rest in one lump sum (a balloon) after a few years.

Start from an example, then change any number:

Monthly payment

$1,796

You'd pay the seller $1,796 a month for 5 years. Then the rest, $254,155, is due at once. Plan to refinance with a bank or sell before then, and start talking to lenders a year early.

Down payment

$30,000

Total interest

$91,934

Balloon, year 5

$254,155

Total cost

$391,934

Year-by-year schedule

Loan balance by yearBalloon due

Year	Payments	Interest	Principal	Balance
1	$21,556	$18,813	$2,743	$267,257
2	$21,556	$18,615	$2,941	$264,316
3	$21,556	$18,402	$3,154	$261,163
4	$21,556	$18,174	$3,382	$257,781
5	$21,556	$17,930	$3,626	$254,155

Balloon due at the end of year 5$254,155

What could go wrong

The buyer stops paying. The seller may have to foreclose to get the property back. That can take months and cost legal fees, and the property may come back in worse shape. A bigger down payment lowers this risk.
The buyer can't pay the balloon. The buyer must refinance with a bank, sell, or pay $254,155 in cash by year 5. If rates are higher, their credit slips, or the property is worth less, they may not qualify and could lose it.
Federal lending rules. When the buyer will live in the home, federal rules (the Dodd-Frank Act and the SAFE Act) may apply to the seller. They can limit how many homes a seller finances, whether a balloon is allowed, and require checking that the buyer can afford the payment. Some sellers must use a licensed loan originator. An attorney can tell you what applies.

Before you sign

Get a title search and title insurance, so you know nobody else has a claim on the property.
Write the deal into a promissory note and a mortgage or deed of trust, and record it with the county.
Agree in writing on late fees, what happens after a missed payment, and who pays taxes and insurance.
Buyer: get a home inspection and an appraisal before you sign.
Seller: check the buyer's credit, income and references, like a bank would.
Consider a loan servicing company to collect payments and keep the records.

This is not legal or tax advice. The rules for these deals vary by state. Have a real estate attorney review the contract before you sign.

Monthly payment$1,796

How this is calculated

1Down payment = price × down payment %. The amount financed (the note) = price − down payment.
2Monthly payment = the standard loan payment on the note: note × r ÷ (1 − (1 + r)⁻ⁿ), where r is the yearly rate ÷ 12 and n is the years it's paid off over × 12.
3Each month, interest = balance × r, and the rest of the payment lowers the balance.
4Balloon = the balance left after the last payment before the balloon date. With no balloon, the note is paid off on schedule.
5Seller's spread = the buyer's payment − the seller's own mortgage payment.
6Note's value if sold = each remaining payment and the balloon, discounted at the note buyer's return: payment × (1 − (1 + d)⁻ⁿ) ÷ d + balloon ÷ (1 + d)ⁿ, where d is that return ÷ 12.

Assumes a fixed rate, payments on time, and interest figured monthly. Property taxes, insurance, closing costs, servicing fees and late fees aren't included. This is not legal or tax advice: the rules for seller financing vary by state, so have a real estate attorney review the contract.

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Words to know

Seller financing: Also called owner financing or an owner-carry note. The seller lends the buyer the price instead of a bank.
Promissory note: The buyer's written promise to repay the seller: the amount, rate, payment and due dates.
Mortgage or deed of trust: The document that lets the seller take the property back if the buyer stops paying. It's recorded with the county.
Down payment: Cash the buyer pays at closing. The rest of the price is the note.
Amortization: Spreading a loan over a number of years so that each payment covers interest plus some of the balance.
Balloon payment: The balance still owed on a set date, due in one lump sum. Buyers usually refinance or sell to pay it.
Spread: The seller's income from the note minus the seller's own mortgage payment.
Selling the note: Trading the buyer's future payments to an investor for cash today. Investors pay less than the balance (a discount).
Due-on-sale clause: A line in most mortgages that lets the lender demand the full balance when the property is sold.
Loan originator: A licensed person who arranges home loans. Federal rules may require one for some seller-financed home sales.

Frequently asked questions

What is seller financing?: The seller acts as the bank. The buyer pays some cash at closing and pays the rest of the price to the seller in monthly payments, under a promissory note secured by the property.
What interest rate is normal for seller financing?: There's no set rate. Buyer and seller agree on it. It's often near or a little above bank mortgage rates, because the seller takes more risk and the buyer gets easier approval.
Why would a seller offer owner financing?: To sell faster or to buyers banks won't approve, to earn interest instead of letting cash sit, and sometimes to spread the tax on the gain over several years (an installment sale). Ask a tax advisor about your case.
What happens if the buyer stops paying?: The seller can usually foreclose under the mortgage or deed of trust and take the property back. The steps and timing depend on the state, so this is a question for an attorney.
Can the seller still have a mortgage?: Sometimes, but it's risky. Most mortgages have a due-on-sale clause, so the seller's lender can demand the full balance after a sale. A deal that keeps the old loan in place is often called a wraparound.
Do federal lending rules apply to seller financing?: They can when the buyer will live in the home. The Dodd-Frank Act and the SAFE Act set limits on things like balloons and how many homes a seller finances, and some sellers must use a licensed loan originator. An attorney can tell you what applies to your deal.