What is seller financing?
How it works
In a seller-financed deal, the seller extends credit to the buyer for part or all of the purchase price. You typically make a down payment, then pay the seller monthly with interest over an agreed term. The seller may keep the legal title until you pay off the loan, or they may transfer title and hold a mortgage lien.
Common structures include a land contract (also called a contract for deed), a lease option, or a wrap-around mortgage. Each has different legal and tax consequences, so it's smart to have a real estate attorney review the documents.
Seller financing is most common when traditional financing is hard to get—for example, with fixer-uppers, unique properties, or buyers with credit challenges. It can also save on loan fees and closing costs.
- Down payment: often 5–20% of the purchase price, but can be negotiable.
- Interest rate: often 1–3% higher than conventional mortgage rates.
- Term: typically 5–30 years, with a balloon payment due at the end.
- Paperwork: promissory note, mortgage or deed of trust, and purchase agreement.
- Risk: seller can foreclose if you stop paying, just like a bank.
Why sellers agree
Sellers may earn interest income, spread out capital gains taxes through an installment sale, and sell faster without waiting for a buyer's bank approval. For buyers, it can mean less strict credit and income requirements.
However, sellers often charge a higher interest rate to compensate for the risk. And if the seller still owes a mortgage on the property, the due-on-sale clause may require the lender's approval—or the lender could call the loan due.
Common mistakes
- Assuming seller financing means no down payment—most sellers still want some cash upfront.
- Ignoring the due-on-sale clause if the seller has an existing mortgage, which can trigger foreclosure.
- Skipping a title search and lien check, only to inherit the seller's unpaid debts.
