What is Seller Financing?

-Priscilla Marquez

Owner financing, also known as seller financing, occurs when a seller agrees to let a buyer pay for a property over a period of time. This seller-provided private finance may be used in place of or in addition to a traditional mortgage.

The buyer and seller agree on the payment amount, interest rate, and other parameters. The down payment made by the buyer and the existence of any bank loans will determine the amount that the seller will finance.

Here’s an example of how it works…

A homeowner lists their home for sale, either independently or with the help of a real estate agent. A buyer submits an offer, and they settle on a $175,000 sales price with a $17,500 10% down payment.

The seller bears back the remaining balance of $157,500 in the form of a note and mortgage rather than forcing the buyer to secure a bank loan. A note and deed of trust or a real estate contract might also be appropriate, depending on the state’s standard forms. The closing is frequently handled by a title firm or real estate attorney.

The terms of repayment are outlined in the note. In this instance, they settle on an interest rate of 8.5 percent, or $1,211.04 per month, with a 360-month amortization. The note stipulates that the balloon payment, also known as the final payment, must be made within seven years because the seller doesn’t want to wait the entire 30 years for payments.

The legal arrangement is known as a private mortgage, seller carry-back, or installment sale because the buyer is paying the seller directly rather than an institutional lender. If the buyer does not make payments, the seller has identical mortgage rights to a bank and may foreclose and reclaim the property.

The seller can sell or assign the rights to future payments to a note investor on the secondary market if they want cash now rather than payments over time.