What is seller financing?

Seller financing: how does it work?

Seller financing, also called owner financing or a seller carry, is a sale where the seller extends credit to the buyer for some or all of the purchase price. The buyer takes title at closing. The buyer owes the seller a promissory note and gives the seller a deed of trust on the property as security. The buyer makes monthly payments to the seller, or to a servicer acting for the seller, until the note is paid or refinanced.

Investors reach for it when a buyer cannot or does not want to use a bank, when a seller owns the property free and clear and prefers income over a lump sum, or when the two sides can agree on a price and terms a bank would not offer. Nothing about it requires a bank, and that is the whole point.

The documents your attorney drafts

• Promissory note. The buyer's written promise to pay: amount, interest rate, payment, term, late charges, what happens on default.
• Deed of trust. Recorded against the property so the seller has a lien and can foreclose if the note is not paid. Some states use a mortgage instead.
• Warranty deed. Transfers title to the buyer at closing.
• Seller financing addendum. In Texas there is a standard TREC addendum. A Texas real estate attorney writes that the standard form is insufficient on its own for wraps and should be supplemented by a custom attorney-drafted addendum, and warns against seminar forms and internet forms generally.
• Disclosures. Depending on the state and the structure, written notices to the buyer before signing. Texas has specific ones for wraps and for certain seller-financed sales.

Who writes these matters. Short, title-company-style documents are described by the same attorney as almost always a mistake, and the recommendation is that each side have its own counsel. A transaction coordinator tracks the drafts and makes sure the signed versions reach the title company. The drafting is the attorney's.

The terms people negotiate

There is no bank underwriting, so the terms are whatever the buyer and seller agree to and the attorney will write:

• Down payment. Cash to the seller at closing. Investors call the total cash in the "entry fee."
• Interest rate and payment. Fixed or adjustable, interest-only or amortizing.
• Term and balloon. Many seller-financed notes run for a few years and then require the balance to be paid in full or refinanced. That lump sum is a balloon. Balloon terms on seller-financed residential loans are subject to federal rules, and sources disagree on exactly how they apply to the exemptions described below. This is attorney territory, not a line on a checklist.
• Escrow. Whether taxes and insurance are collected with the payment, usually through a servicer.
• Default and cure. What counts as default and how long the buyer has to fix it.

The rules that sit on the seller-lender

Because the seller is making a residential mortgage loan, mortgage-origination rules can apply to the seller. The main ones, as described by Texas real estate attorneys:

• Federal (Dodd-Frank, Regulation Z). An individual, estate or trust that seller-finances only one property in a 12-month period can be excluded from the loan originator definition, with conditions on the loan terms. Any person, including an entity, that finances three or fewer properties in 12 months can also be excluded, with stricter conditions: the loan must fully amortize, the rate must be fixed or adjustable only after five years, and the seller must determine in good faith that the buyer can repay. Outside those exclusions, a licensed residential mortgage loan originator (RMLO) is involved.
• Texas. State licensing law layers on top. Attorneys describe the rule as: the seller is an RMLO, or an RMLO is involved in the transaction, unless an exemption applies, such as a homestead sale or a sale to immediate family. Sources disagree on the exact Texas loan-count threshold, so do not rely on a number from a seminar.
• Executory contracts. A contract for deed, lease-option with the deed held back, or deed-in-escrow arrangement is treated differently from a true sale with a note and deed of trust, and Texas regulates it heavily. Attorneys warn not to describe those structures as "just a wrap" or "just seller financing."

None of this is the coordinator's call. The file tracks which exemption or which RMLO applies, who confirmed it, and when. The seller-lender and their attorney decide.

Servicing and insurance

A third-party loan servicer collects the buyer's payment, keeps the ledger, handles escrow and sends year-end statements. Using one keeps the seller out of the bookkeeping and gives both sides a record. Setting it up before closing, so the first payment is scheduled when the deed records, is a standard step on the file.

The buyer is the new owner and places an owner's policy with the seller named as mortgagee, the same way a bank would be named. The insurance agent writes it; the file confirms the binder before closing.

The file, step by step

1. Contract in. Purchase agreement with the financing terms, parties, deal type. Checklist and calendar built.
2. Existing lien check. If the seller still has a loan, the deal is a wrap, not plain seller financing, and the file changes. See the wrap explainer.
3. Attorney drafts. Note, deed of trust, addendum, disclosures. Both sides should have counsel.
4. RMLO or exemption confirmed by the seller-lender and attorney; recorded on the file.
5. Title opened. Commitment issued, items cleared.
6. Servicer and insurance set up before signing.
7. Closing and after. Settlement statement checked, signing, funding, recording, first payment confirmed, closing packet sent.