How a seller-financed deal is structured
The buyer and seller sign a promissory note that spells out the loan amount, interest rate, payment schedule, and term, plus a mortgage or deed of trust that secures the note against the property. The buyer takes title and makes monthly payments to the seller exactly as they would to a bank — the seller simply holds the note instead of a lender.
Most seller-financed notes are not fully amortized over 30 years. The common structure is a shorter term — often three to seven years — with payments calculated on a longer amortization schedule and a balloon payment due at the end. That gives the buyer time to improve the property, season the deal, and then refinance into a conventional or DSCR loan to pay the seller off.
What you actually negotiate
Every term is on the table, which is the whole point. Down payment, interest rate, amortization length, balloon timing, and whether there is a prepayment penalty are all negotiated directly between you and the seller. A motivated seller who owns the property free and clear has the most flexibility, because there is no underlying lender to satisfy.
The seller’s motivation drives the deal: someone selling an inherited property, retiring out of being a landlord, or struggling to sell a hard-to-finance property is often happy to carry a note in exchange for a steady monthly income stream and the ability to spread their capital-gains tax over the life of the loan (an installment sale). Frame your offer around the problem you solve for them.
The risks to manage on both sides
For the buyer, the biggest risk is the balloon. If you cannot refinance or sell before it comes due, you can lose the property and your down payment. Build a realistic refinance plan before you sign, and negotiate the longest balloon you can get.
If the seller still has a mortgage on the property, their loan almost certainly has a due-on-sale clause — selling on terms can let their lender call that loan. A wraparound mortgage is the structure used to work around this, but it adds risk and complexity; have a real-estate attorney paper any wrap. Always use an attorney or title company to draft the note and record the security instrument — a handshake deal is how both sides get hurt.
Pros and cons
Pros
- No bank qualifying — credit and income documentation are negotiable
- Every term (rate, down, term, balloon) is negotiable
- Faster, cheaper closing — no lender underwriting or origination fees
- Can finance properties banks reject as non-conforming
Cons
- Usually carries a balloon payment that forces a refinance or sale
- Requires a willing, ideally free-and-clear seller — most are not
- Due-on-sale risk if the seller has an existing mortgage
- Needs careful legal documentation to protect both parties
Frequently asked questions
Is seller financing legal?
Yes. Seller financing is legal in every state, though investor-as-lender deals must still respect applicable usury limits and, for owner-occupant buyers, federal rules like the SAFE Act and Dodd-Frank. For investment property between sophisticated parties the rules are lighter, but always close through an attorney or title company.
What down payment is typical with seller financing?
There is no fixed requirement because it is negotiated, but sellers commonly ask for 10–20% down to protect their position. A larger down payment gives the seller more security and gives you leverage to negotiate a lower rate or longer term.
How is seller financing different from subject-to?
In seller financing the seller creates a new note for you and is paid off (or paid over time) at closing. In a subject-to deal, no new loan is created — you take over the seller’s existing mortgage and keep making those payments. Seller financing needs a willing lender-seller; subject-to needs an existing loan worth keeping.