What is Seller Financing?
Seller financing (also called owner financing or seller carryback) is when the property seller acts as the bank. Instead of the buyer getting a traditional mortgage from a lending institution, the buyer makes monthly payments directly to the seller at terms they agree upon. The seller holds a promissory note secured by the property.
This arrangement works best when the seller owns the property free and clear (no existing mortgage) and is willing to receive payments over time rather than a lump sum. Sellers benefit from interest income and potential tax advantages through installment sale treatment.
Key Terms to Negotiate
Down payment (typically 5-20%), interest rate (usually 4-8%), amortization period (15-30 years), balloon payment date (3-10 years or none), late payment penalties, prepayment penalties, and what happens in case of default. Every term is negotiable — that is the beauty of seller financing. You are not bound by institutional lending guidelines.
Balloon Payments
Many seller-financed deals include a balloon payment — a date at which the remaining loan balance becomes due in full. This is typically 3-7 years from closing. Monthly payments are calculated based on a longer amortization (20-30 years), keeping them low, but the buyer must refinance or pay off the balance by the balloon date. Always plan your exit before agreeing to a balloon.