Seller Financing: When the Seller Acts as the Lender

In seller financing, the seller accepts payments over time rather than being paid in full at closing. They hold a promissory note secured by the property, and effectively act as the bank. No mortgage lender is involved.

How the terms get set

Everything is negotiable, because there are no underwriting guidelines, only what the two parties agree to:

• Down payment: commonly 10% to 20%, sometimes less
• Interest rate: often below market, sometimes above
• Term: frequently a 5-year term amortised over 20 or 30, with a balloon payment at the end
• Payments: usually monthly principal and interest

An example

A US$150,000 house with 10% down (US$15,000) and a US$135,000 seller note at 6% over 30 years, balloon at year 5. The payment is about US$809 a month. At year 5, roughly US$125,900 is still owed and falls due as a lump sum, refinanced into a conventional loan or paid from a sale.

That balloon is the part to take seriously. It is a hard deadline, and if rates or your circumstances have moved against you by then, refinancing may not be available on terms that work.

When sellers agree

Rarely with a mortgage still on the property, because most mortgages have a due-on-sale clause. It happens most with:

• Owners who hold the property free and clear, often after decades
• Sellers who want to spread the capital gain over years instead of realizing it at once
• Tired landlords who want out of management but like the income
• Properties that have sat unsold, where financing widens the buyer pool

What to check first

• Is there an existing mortgage? If so, a due-on-sale clause can let that lender call the loan.
• Get a title search. You are relying on the seller actually owning it clear of liens.
• Use a real estate attorney. This is a bespoke contract, not a standard form, and the cost is trivial against the risk.
• Record the note and mortgage properly so your interest is protected.
• Confirm you can refinance before a balloon arrives, if there is one.

The trade-off

You get flexible terms, a faster close, and no lender underwriting you. You take on documentation risk, usually a shorter term, and a seller who may be far less predictable than a bank. The flexibility is real, and so is the need for a lawyer.

Related reading

The financing options rundown compares this with conventional and DSCR routes, and the offer submission checklist covers structuring an offer.