Sell your house with seller financing

What seller financing actually is

In a normal sale, the buyer gets a mortgage from a bank and you are paid in full at closing. With seller financing, sometimes called owner financing or a seller carryback, you accept part of the price now and the rest over time. The buyer signs a promise to pay you, and the house itself backs that promise.

Title usually passes to the buyer at closing, just as in any sale. What changes is who is owed the money afterward. Instead of the buyer owing a bank, the buyer owes you.

That shift is the whole trade-off. You may reach buyers who can't get a conventional loan right now, and you collect interest along the way. In exchange, your money comes in slowly, and you depend on the buyer to keep paying.

The paperwork: a note and the security behind it

Two documents do most of the work. The promissory note is the buyer's written promise to repay: how much, at what interest rate, on what schedule, and what happens if a payment is late. The security instrument, a mortgage or a deed of trust depending on the state, ties that promise to the house so you have a legal claim on it if the buyer doesn't pay.

The security instrument is normally recorded in the county records, which puts the world on notice that you hold a lien. An unrecorded or loosely written arrangement leaves you exposed, so these documents are worth having drafted or reviewed by a real estate attorney in your state.

• Down payment: how much the buyer puts in at closing. A larger down payment gives the buyer more to lose and gives you a cushion.
• Interest rate: what the buyer pays for borrowing from you.
• Term and amortization: how long the loan runs and whether the payments fully pay it off by the end.
• Balloon payment: a lump sum due before the loan would otherwise be paid off, used only where permitted and where the rules allow it.
• Late charges, default and prepayment terms: what happens if payments stop, and whether the buyer can pay early.

If you still have a mortgage on the house

This is where many seller-financed deals go wrong. Most mortgages contain a due-on-sale clause, which lets the lender demand the full balance if the property is sold or transferred. Federal law generally allows lenders to enforce these clauses, with limited exceptions such as certain transfers to a spouse or child. A sale to an unrelated buyer is usually not one of the exceptions.

Some arrangements, often called wrap-around mortgages, leave your existing loan in place while the buyer pays you and you keep paying your lender. That can work on paper, but it carries real risk: your loan stays in your name, the lender may call it due, and if the buyer stops paying you are still responsible for your mortgage payments. A missed payment hurts your credit, not the buyer's.

The cleaner path is usually to pay off your existing loan and any other liens at closing, using the buyer's down payment and your own funds if needed. If a payoff isn't possible, talk with an attorney before agreeing to anything that leaves your loan open.

What happens if the buyer stops paying

If the buyer defaults, your remedy is typically foreclosure, the same process a bank would use. How that works depends heavily on your state. Some states use a court-supervised process; others allow a non-judicial process under a deed of trust. Timelines, notice requirements and costs differ widely.

Foreclosure is rarely quick or cheap, and the house may come back to you in worse condition than when you sold it. Some states also give borrowers rights to cure the default or to redeem the property. Before you agree to seller financing, it's worth understanding what default would look like where your house is.

Screening helps. Asking for a meaningful down payment, checking the buyer's ability to pay, and writing clear default terms into the note all reduce, but do not remove, this risk.

Collecting payments: servicing the loan

Someone has to collect payments, track the balance, send year-end statements, and handle escrow for taxes and insurance if you require it. You can do this yourself, but many sellers hire a third-party loan servicer for a monthly fee.

A servicer keeps records that both sides can rely on, which matters if there is ever a dispute or a default. It also keeps the relationship businesslike: the buyer pays the servicer, not your personal account.

Make sure the buyer keeps the property insured with you named on the policy, and that property taxes stay current. An unpaid tax bill can create a lien that comes ahead of yours.

Federal lending rules that can apply to sellers

The Dodd-Frank Act changed how federal rules treat people who arrange home loans. Under Regulation Z, someone who extends credit secured by a home can be treated as a loan originator, which brings compensation and qualification rules. The regulation includes two limited exclusions for sellers who finance the sale of property they own, found at 12 CFR 1026.36(a)(4) and (a)(5).

The three-property exclusion covers a person who provides seller financing for three or fewer properties in any 12-month period. Among its conditions: the seller must not have built the home as a contractor in the ordinary course of business, the financing must be fully amortizing, the seller must determine in good faith that the buyer has a reasonable ability to repay, and the rate must be fixed or adjustable only after five or more years with reasonable limits on increases.

The one-property exclusion is narrower in who can use it: a natural person, an estate or a trust financing only one property in any 12-month period. It does not require full amortization, but the repayment schedule cannot result in negative amortization, and the same fixed-or-qualifying-adjustable rate condition applies. Whether a balloon is workable can therefore depend on which exclusion, if any, applies.

Falling outside these exclusions does not automatically make a deal unlawful, but it can bring additional requirements. State law may also apply, including state licensing under the SAFE Act framework. These are questions for a real estate attorney, not a rule of thumb.

Taxes: installment sale treatment

When you receive at least one payment after the tax year of the sale, the IRS generally treats it as an installment sale. Under that method, you may report the gain as payments come in rather than all at once, and the interest you receive is taxed as ordinary income. IRS Publication 537 and Tax Topic 705 explain the rules, including exceptions and what happens if a note carries too little interest.

Whether installment treatment helps you depends on your income, the property, any depreciation taken, and other factors. A tax professional should advise you before you sign. Nothing here is tax advice, and no structure guarantees a particular tax result.

Seller financing vs. assumption and subject-to

These terms get mixed up, but they are different. In seller financing, you are the lender on a new loan to the buyer. Ideally your old mortgage is paid off at closing.

In a loan assumption, the buyer takes over your existing mortgage with the lender's approval, often under the loan's own assumption terms. In a subject-to sale, the buyer takes the deed while your existing loan stays in your name, usually without the lender's approval. That leaves you liable on a loan you no longer control, and it may trigger the due-on-sale clause.

If someone proposes one of these, ask exactly whose name the loan will be in after closing, who pays it, and what happens to you if they stop.

Seller financing vs. a cash sale

A cash sale ends your involvement at closing. You are paid, the mortgage is paid off, and you walk away. Seller financing keeps you involved for years: you collect payments, watch taxes and insurance, and carry the risk of default.

Seller financing can make sense when you own the house free and clear or nearly so, don't need the money right away, and are comfortable acting as a lender. A cash sale or a traditional listing is often the better fit if you need the full proceeds now, still owe a substantial balance, or simply want a clean break.