Seller financing is when a seller lets a buyer pay for a property over a period of time. This is used either in place of a bank loan, or in addition to a conventional mortgage.
The buyer and seller agree on payment amount, interest rate, and other terms. The amount of financing will be dependent on the buyer’s down payment and bank loans.
Here’s an example of how it works.
An owner puts his or her house for sale.
A buyer makes an offer, and they agree upon a sales price of $200,000 with a 10% down payment of $20,000.
Rather than the buyer getting a bank loan, the seller “carries back” the balance of $180,000 in the form of a note and mortgage. (Or a note and deed of trust or real estate contract, depending on which state the property is in). Always use a title company or real estate attorney for the closing.
The note spells out the terms of repayment. In this case they agree upon 8% interest at $1320.78 per month based on a 360-month amortization.
Because the buyer makes payments to the seller rather than an institutional lender, this legal arrangement is known as a private mortgage, seller carry-back, installment sale, or owner financing. The seller has the same mortgage rights as a bank, so if the buyer doesn’t make their payments, the seller can take the property back through foreclosure.
When the seller prefers cash today rather than payments over time, the rights to future payments can be sold or assigned to a note investor on the secondary market.
And that’s where we come in…