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So, this is what happened last week. A friend called me very upset. She had been trying to buy her first house for six months. They were preapproved and found the perfect place, but cash buyers kept outbidding them. Then her real estate agent told her about something she had never heard of before: seller financing.
"Is that even legal, Casey?" she asked. I totally get how frustrating this is. When you keep losing out on traditional mortgages, seller financing can sound too good to be true.
But here's the thing. Seller financing is completely legal, and it's becoming more popular. Advanced Seller Data Services tracks 2,272 counties and says that seller financing deals went up by 8% in 2024, even though home sales as a whole went down. The average note balance went up from $248,523 in 2023 to $271,655.
That tells you something important. People find other ways to buy a home when banks make it harder to get loans and mortgage rates stay high.
Seller financing is like buying a car from your neighbor and making monthly payments instead of going to a dealership and getting a loan from the bank. The seller is now your lender.
Seller financing is a way to get around when regular systems don't work for some buyers. You find a house you want to buy. You work out payment terms directly with the seller instead of getting a mortgage from a bank. Instead of paying Wells Fargo or Chase, you pay the seller every month. They give you the deed after you've paid off the loan and interest.
A purchase-money mortgage or “owner financing” is another name for it. Different names for the same idea.
The deal works because both sides get what they want. Sellers can sell homes faster because they don't have to wait for buyers to go through all the steps with the bank. People who might not be able to get traditional financing, like those with bad credit or irregular income, can still buy a home.
Let me be honest with you for a moment. The housing market is strange right now.
Most of 2024, mortgage rates were between 6% and 7%. The National Association of REALTORS® said that sales of existing homes fell 0.7% in 2024, making it the worst year since 1995. First-time buyers made up a record-low share of the market.
But what about seller financing? It got bigger.
That isn't random. People look for other options when it gets harder to get a regular loan, which it definitely has. The Mortgage Bankers Association's Mortgage Credit Availability Index showed that credit was at its lowest point since January 2013 in early 2023. Since then, lending standards haven't changed much.
In 2024, Texas had the most seller-financed deals in the country, followed by Florida, California, North Carolina, and Georgia. A lot of seller financing happened in these five states alone. Tennessee made it into the top 10 for the first time, taking Oregon's place.
I'll make this easier for you.
When you buy a house the old-fashioned way, you apply for a mortgage, the bank approves your loan, you close with bank money, and you pay the bank back for 15 or 30 years.
Seller financing means that you and the seller agree on a price, sign a promissory note and deed agreement, and make payments directly to the seller until the loan is paid off. When the loan is paid off, the seller transfers the deed.
Most sellers hire a service to keep everything organized, collect payments, and handle escrow for property taxes and insurance. That keeps everyone safe. You don't want to have to chase payments every month, and the seller doesn't want to have to do that either.
I've seen seller financing work well when both sides have lawyers look over everything before they sign. That contract needs to say exactly what will happen if you miss a payment, how property taxes are paid, who is responsible for repairs, and everything else.
In August 2024, the Consumer Financial Protection Bureau put out a report just about contracts for deed, which is one type of seller financing. They confirmed that the federal Truth in Lending Act protections apply, which means that bigger sellers must check your ability to repay and give you accurate information.
A lot of people don't know that this is a big consumer protection.
This is probably the type I see the most. The seller keeps the title in their name until you pay off the full amount. You're basically renting with the promise to buy.
A lot of land contracts have balloon payments due at the end. You might have to make 60 monthly payments of $2,000 each, and then you owe $50,000 as a final balloon. You should know ahead of time if you can turn that balloon into a regular mortgage or if you'll have cash on hand.
The CFPB report I talked about before focused a lot on land contracts because they have been used in the past to take advantage of weak buyers, especially in religious and immigrant communities. Some dishonest sellers set prices for homes way above market value, charge high interest rates, and set buyers up to fail so they can take the property back and do it all over again.
That's why you have to work with a real estate lawyer before you sign any land contract.
This one is unique. You're not getting any new money. You are taking over the seller's current mortgage.
Only loans backed by the government, like FHA, VA, and USDA loans, can be assumed. You can't take over a regular mortgage.
If the seller took out a VA loan in 2021 with a 3.5% interest rate, the current rate is 7%. If you think a 3.5% loan sounds great, you're right. But there's a problem. You need $150,000 in cash up front to make up the difference if they owe $200,000 and the home sells for $350,000.
That is a big problem for most buyers.
You rent the property with a contract that lets you buy it later for a price that both you and the landlord agree on. Some of your rent could go toward your down payment when you buy the house.
A client of mine did this a few years ago. Her divorce had hurt her credit, so she wasn't quite ready to buy. She found a seller who was willing to let her buy the house over two years. She put down $5,000 as an option fee, rented the house for $1,800 a month (with $300 of that going toward her down payment), and after two years, she bought it for the agreed-upon price of $285,000.
It worked for her. But if she had left, she would have lost that option fee and all of those credits for the down payment.
Are you buying land that is empty so you can build on it later? Some landowners will pay for the sale themselves instead of making you get a bank loan for the land.
It is well known that it is hard to get a land loan from a traditional lender and that the interest rates are higher. It can be easier to get seller financing for land, but you still need to make sure the land is buildable, check the zoning, and make sure the utilities are available.
Things get complicated very quickly. The seller still owes money on the property, but they want to sell it with financing anyway. You pay the seller, and they keep the difference between what you pay them and what they owe their lender. They then keep making their mortgage payments.
The problem is that most mortgages have clauses that say they must be paid off when the house is sold. The lender can ask for full repayment right away when the property changes hands. So, there is a big risk that the seller's lender could ruin the whole deal with a wraparound mortgage.
The best thing about it is that it's easier to qualify. You were turned down for a mortgage because your debt-to-income ratio was 44% instead of 43%? The seller might not care.
Self-employed buyers love seller financing because it's a pain to prove income to traditional lenders when your tax returns show every legal deduction you can think of.
Without a bank, closing costs are usually lower. No fees for starting the loan, no fees for the bank's lawyer, and fewer fees for other parties. AmeriSave's simple process for traditional loans keeps costs low, but seller financing usually beats our low closing costs by a few thousand dollars.
Being flexible is also important. You can talk about everything, like interest rates, payment plans, and down payments. Banks don't talk about money. Sometimes sellers will.
Buyers have some problems.
The big one that no one talks about enough is that your payments probably won't show up on your credit report. Your credit score won't change even if you make 60 perfect payments on time.
Interest rates are often higher than bank rates. That seller isn't Citibank, which has access to the costs of institutional funding. They are taking a risk, and they charge you interest on that risk. Depending on your credit history and how willing the seller is to negotiate, I've seen seller financing rates range from 5% to 10%.
There are strange ways that foreclosure risk can happen. If you're in a wraparound mortgage and the seller stops paying their lender, that lender can still foreclose even if you're making your payments on time. You could do everything right and still lose the house because the seller made a mistake.
Most sellers don't let buyers have home inspections before they buy. This means you could buy a house that has $30,000 worth of foundation problems that you didn't know about.
Weaker protections for consumers. The CFPB's advisory opinion from August 2024 is helpful, but enforcement is still behind the times.
When you need to move, quick sales are important. You don't have to wait three months for a buyer to clear underwriting.
Tax breaks can be very helpful. Under IRS rules, seller financing is an installment sale. Instead of paying all of your capital gains taxes at once in the year of sale, you pay them as you get paid over time.
People who are retired or want to make money without doing anything like work like steady income. You become a lender and charge interest.
It gets easier to sell properties "as-is." Buyers who are willing to use seller financing often buy homes that need work.
You are taking on all the risk that a bank would normally take. What if the buyer doesn't pay? You're going through foreclosure and trying to get your property back.
You don't get all of your money right away. Seller financing makes it hard to get the money you need to buy your next home.
The state of the property matters even after you sell. If the buyer stops taking care of the property and you have to foreclose, you will get back a damaged asset.
Let's talk about numbers. Advanced Seller Data Services looked at 2,272 counties and found that the seller financing market had some interesting trends in 2024.
Average down payment percentage: about 27% (calculated from a 73% loan-to-value ratio)
Year-over-year increase in seller financing volume: 8% Overall home sales change: -0.7% decrease
In 2024, Texas alone had 170 more seller-financed transactions than in 2023. California had 2,135 fewer deals than the rest of the country, but it still made up 30% of the drop in seller financing.
If the average buyer puts down 27%, you need about $73,000 in cash to buy that home. You wouldn't put down 3.5% on an FHA loan or 0% on a VA loan. Seller financing doesn't always mean less money up front.
Let me show you what this looks like with some real numbers if you're buying a house for $300,000.
You need to pay $70,500 more in cash up front for seller financing, but when you add in PMI, it saves you about $500 a month. If you have the extra cash for the down payment, seller financing will save you $37,500 in interest over 30 years.
We help buyers at AmeriSave compare their options to find the best financing option for their needs.
Your credit has been hurt recently, but your income is stable. You went through a divorce or medical bankruptcy two years ago. Your credit score is 580. You work full-time and make $75,000 a year. For at least another year, banks won't touch you. A seller might.
Self-employment with complicated income: You own a small business that makes $120,000 a year, but your tax returns only show $60,000 because you take every deduction and write off equipment. Banks look at tax returns when they decide whether to lend money. Sellers base their decisions on how well their business is doing.
Buying investment properties: You already own three rental homes, and banks won't let you have more than four mortgaged homes. Seller financing for property number five doesn't count toward that limit.
Getting a loan for land or unusual properties: Banks don't like to lend on empty land, farms with multiple parcels, or properties that can be used for both business and residential purposes. Individual sellers are more open to unusual situations.
If you inherit property that needs time to sell, your seller got the house as an inheritance and doesn't need cash right away. Instead, they want steady monthly income. The perfect person to offer seller financing.
The CFPB put out an advisory opinion on August 13, 2024, making it clear that the Truth in Lending Act protects contracts for deed and other types of seller financing.
Before agreeing to finance, bigger sellers need to check your ability to pay back. They can't just take your down payment, set you up to fail, and then start the cycle all over again.
Sellers must give buyers accurate information about interest rates, payment plans, and total costs. They can't hide the finance charge by raising the price of the item and saying there is no interest.
Some dishonest sellers have historically gone after religious groups by selling contracts that they said followed religious rules against interest, but really just hid the interest in other terms. The CFPB opinion makes it clear that this is not okay.
There are big differences between states when it comes to seller financing rules. There are certain disclosure rules in Kentucky, where I live. The rules in Texas are different. For residential properties with one to four units, California has its own seller financing addendum requirement.
Check what your state requires and make sure the seller is following those rules before you sign anything.
Yes, if you can get a regular mortgage at that time. A lot of buyers use seller financing as a short-term solution. They pay for two or three years to improve their credit or stabilize their income, and then they refinance into a regular mortgage and pay off the seller in full.
The balloon payment structure that is common in seller financing actually makes this path more likely. Your seller might not want to lend you money for 30 years. They set a balloon payment for the fifth year, and you refinance before that payment is due.
When that time comes, AmeriSave can help you look into traditional refinancing options to pay off the seller and switch to traditional financing with better long-term terms.
Not usually. Most sellers don't tell Equifax, Experian, and TransUnion about their sales. You can pay a third party to report your payments, but it's not automatic like with bank mortgages.
This makes for a strange situation where you're building real equity and showing that you can handle owning a home, but your credit score doesn't show any of that.
How the seller set up their estate and what your contract says will determine this. The promissory note is something that their heirs or estate will get. You keep making payments, but to a different person.
This is why it is so important to have the right legal papers. The contract should say what happens in different situations, such as if the seller dies, if you default, if the property is damaged, if there are title problems, and so on.
In one case I know of, the seller died and their three grown children got the note. They couldn't agree on whether to keep collecting payments or ask for full payment right away. It became a legal mess that made it hard for the buyer to refinance and get clear title.
Ask your lawyer to add clauses that deal with the death of the seller and the transfer of ownership of the note.
Maybe. There are seasoning requirements for FHA loans. You usually need to own the property for at least 12 months before refinancing with FHA. If you have a lot of equity or are doing a cash-out refinance, you may need to own it for longer.
The property also has to pass an FHA appraisal. You might not be able to refinance with the FHA until you fix the big problems if you bought the house as-is and got seller financing.
It all depends on your situation. If you have good credit and a steady W-2 income, traditional mortgages are usually cheaper. Banks still have lower interest rates than most seller financing plans.
But if you can't get traditional financing at all, seller financing isn't more expensive; it's the only choice. If you can't get approved for a regular mortgage, comparing seller financing at 7% to a regular mortgage at 6.5% is pointless. (Technically, the 7% is still more expensive, but you get what I mean about how the comparison isn't fair.)
Also, seller financing has lower closing costs. You don't have to pay bank origination fees, mortgage insurance, or other bank-related fees. That savings up front is important.
Most seller financing contracts have a due-on-sale clause, just like bank mortgages. You have to pay your seller when you sell to someone else.
With the seller's permission, some contracts let you give the financing to your buyer. That's what a junior wraparound or secondary owner financing is. Hold on, let me make that clear: it's not very common. The original seller stays in first place, you become the middle lender, and the buyer pays you. But that quickly becomes a legal mess. Most real estate lawyers say that when you sell, you should just pay off the original seller instead of setting up complicated financing plans.
Just like if you owned the property free and clear, the buyer (you) usually pays property taxes and homeowners insurance directly. Even though the seller might still own the property legally, you are responsible for those costs during the contract period.
Escrow accounts, where part of your monthly payment goes toward taxes and insurance, are a better way to set things up. The seller or the company that takes care of the property pays those bills from the escrow account. This is good for both sides because the seller knows the taxes are being paid and you don't have to worry about forgetting a big property tax bill every year.
No. Every state has laws against usury that limit the amount of interest that can be charged on different kinds of loans. These are different in each state. Some states limit the interest on residential mortgages to 10%, while others have different limits.
If a seller financing agreement goes over the state's limits on usury, it may be void or subject to penalties. Get help from a lawyer who knows the laws in your state.
All of it. All of the papers. The purchase agreement, the promissory note, the deed of trust or mortgage, disclosure statements, inspection reports if you got any, appraisals, insurance policies, property tax receipts, and records of every payment you make.
Keep copies in both paper and digital form. When you finally refinance or sell, you'll have to show proof of payment history, proof that you took care of the property, proof that you paid your taxes, and all of it.
I tell clients to make a separate folder on their computer and in their filing cabinet just for seller financing documents. Add payment confirmations to it every month.
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