Seller Financing Guide

The seller of real estate will sometimes finance the sale for the buyer. Sellers often finance for a shorter period and at a higher interest rate than traditional lenders. However, closing costs are generally less for a seller-financed home than for those that traditional lenders finance.

On this page, we will cover these topics: ​

Why might a seller want to finance the sale?

Seller financing, also called owner financing, is one way to move a property sale forward if the buyer cannot obtain a mortgage from a traditional source. Buyers may be unable to obtain a mortgage because they lack a good credit history, a large down payment, or long enough work history to qualify for a traditional mortgage. Or, they may be unable to obtain a mortgage through a traditional lender because of the age or condition of the property.

Seller financing can help a seller obtain a higher price for the property than if the buyer finances the mortgage through an institution because the property doesn’t have to appraise for a specific amount. Sellers can also sell a property as-is more easily with seller financing. Seller financing is usually quicker than financing through a traditional lender because appraisals and inspections aren’t necessary unless the buyer requires them.

How does seller financing work?

The seller draws up a promissory note contract that details the interest rate, the number and amount of payments and the consequences if the buyer fails to make payments.

Sellers and buyers can structure financing creatively based on their own needs. For example, land contracts pertain to a specific tract of land, which may include real estate on it. The seller can also structure the loan for a short time, such as five years, and include a balloon payment at the end of the period. Balloon payments require the buyer to pay off the loan at the end of the period, such as by a cash out refinance. The buyer may qualify for a traditional loan at the end of five years based on higher credit scores and more property equity.

Can sellers finance a property they are still paying a mortgage on?

Sometimes sellers can finance a property on which they are still paying a mortgage, but they must be sure their current mortgage doesn’t contain a due-on-sale clause, which requires repayment of the mortgage in full when the owner sells the property. So, if the seller is still paying a mortgage with a due-on-sale clause and seller-finances the the property, the seller’s mortgage company could demand immediate repayment. If the seller doesn’t pay the mortgage in full, the original lender will foreclose, leaving the new buyer in the lurch.

If the seller’s mortgage does not contain a due-on-sale clause, the seller will propose a wrap-around loan. The wrap-around loan takes into account the amount the seller still owes, and the seller will structure its terms so that they make a profit on the spread, which is the difference between the interest rates they pay and the amount they charge the new buyer.

For example, suppose Suzy still has $60,000 remaining on her mortgage. She sells her home to Brian for $100,000, who pays 10 percent down and borrows the rest at a six percent interest rate. Suzy’s interest rate is three percent. So, Suzy will receive $10,000 in cash and earn six percent interest on the difference between $100,000 and $60,000 and three percent interest on the remainder.

Do sellers have to carry the loan for the entire term?

No. If a seller wants a lump sum rather than ongoing payments, they can sell the mortgage to a company that buys private mortgages. The sale can often occur soon after the closing, so they can receive the lump sum almost immediately.

Deed Street Capital buys privately held mortgage notes, including those held by sellers. We purchase notes with values from $25,000 to $3 million. We offer fair prices for the notes based on several factors, including:

We have extensive experience buying mortgage notes from sellers who are seeking to obtain cash now for their mortgage note.