What is Seller Financing?
Seller financing (also called owner financing) is when the property seller acts as the lender — the buyer makes monthly payments directly to the seller instead of a bank. Used when the seller owns free-and-clear, wants ongoing income, or when the buyer can't qualify for traditional financing.
Seller financing is structured as a promissory note + mortgage (or deed of trust) recorded against the property. The buyer takes title; the seller is in second (or first) lien position with foreclosure rights if the buyer defaults.
Terms are fully negotiable. Common structures: 5-10% down, 6-8% interest rate (often below market for the buyer's benefit), 15-30 year amortization, 3-7 year balloon (the entire remaining balance due at the balloon date — forces a refi or sale). Sellers often prefer this because the balloon eventually returns their capital while they collect interest in the meantime.
Seller financing is most accessible when the seller owns the property free-and-clear (no underlying mortgage) and has emotional reasons to want recurring income — inherited property, retirement income, or a desire to defer capital gains via an installment sale under IRC §453.
Free-and-clear property worth $200,000. Seller agrees to finance: $20,000 down, $180,000 note at 6.5% over 30-year amortization with 5-year balloon. Monthly payment $1,138. At year 5, balloon = $168,407 due.
Concepts that connect.
A "subject-to" deal is when an investor buys a property and takes title, while leaving the seller's existing mortgage in place — the investor makes payments on the seller's loan. Used to acquire properties with locked-in low rates or when the seller is behind on payments and needs to walk away.
Creative finance is the family of non-conventional real-estate transaction structures — subject-to, seller financing, wraparound mortgages, lease options, land contracts. Used when conventional financing doesn't fit the deal or when the seller has motivation to preserve a below-market loan.
A wraparound mortgage ("wrap") is seller financing structured on top of (wrapping) the seller's existing mortgage. The buyer pays the seller; the seller continues paying their own mortgage. The wrap rate is higher than the underlying rate, and the spread is the seller's profit.
A land contract (also called a contract for deed) is a seller-financing structure where the seller retains legal title while the buyer makes installment payments and gets equitable title. Legal title transfers when the contract is paid in full.
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