Seller financing, explained

Instead of borrowing from a bank, the buyer signs a promissory note with the seller and makes monthly payments directly to them. The property usually transfers to the buyer at closing, and the seller holds a lien (a legal claim on the property) until the loan is paid off. If the buyer stops paying, the seller can foreclose, just like a bank would.

Down payments in seller-financed deals commonly range from about 10% to 20% of the purchase price, though everything is negotiable. Sellers often ask for a larger down payment when the buyer's credit is weaker or the property has less demand from traditional buyers.

Rates are set by agreement — there is no lender rate sheet. Seller-financed rates are usually somewhat higher than bank mortgage rates because the seller is taking on risk and often waiting years to be paid in full. In many markets rates land 1–3 percentage points above conventional mortgage rates, but they can be lower if the seller wants a steady income stream.

A seller-financed loan can be amortized (paid off in equal monthly payments) over almost any length — 10, 15, 20, or 30 years. Shorter amortizations mean higher monthly payments but less interest paid over time. The term of the loan and the amortization schedule don't have to match, which is where balloon payments come in.

Many seller-financed loans are structured with a balloon: monthly payments are calculated as if the loan were being paid off over 20 or 30 years, but the entire remaining balance comes due after a shorter window, often 3, 5, 7, or 10 years. The buyer either pays off the balance, refinances into a traditional mortgage, or renegotiates with the seller. Never sign a balloon deal without a plan for how you'll handle the balloon date.

A common playbook is to buy with seller financing, make improvements or build up rental income, and then refinance into a bank loan once the property qualifies. If interest rates drop or your credit improves, refinancing can also replace the balloon payment with a longer-term, more stable mortgage.

Buyers should watch for balloon payments they can't refinance, unclear title (make sure the seller can actually convey the property free of other liens), and above-market interest rates. Missing payments can lead to foreclosure just like a bank loan. Verify that any existing mortgage on the property allows the seller to sell — some mortgages have "due-on-sale" clauses that can be triggered by a seller-financed deal.

Sellers take on the risk that the buyer stops paying, damages the property, or files bankruptcy. Foreclosing takes time and money. Sellers should qualify buyers carefully (credit, income, down payment) and require insurance, tax escrow, and clear reporting in the contract.

Seller financing is a legal contract, not a handshake. A real-estate attorney should draft or review the promissory note, mortgage or deed of trust, and any balloon or prepayment clauses. A title company runs a title search, handles the closing, records the documents with the county, and — if you want it — can service the loan (collect payments, track balances, and issue statements) so both sides have a clean paper trail.

The goal is simple: everyone understands the terms, everyone is protected if something goes wrong, and the paperwork holds up in court if it ever needs to.