How seller financing works
In a seller-financed sale, the seller acts as the lender. The buyer makes a down payment and signs a promissory note, secured by a mortgage or deed of trust, for the rest of the price. Sellers rarely want to collect payments for 30 years, so the note is usually amortized over a long period but balloons after 3 to 5 years. By then the buyer is expected to refinance with a conventional, DSCR or commercial lender.
Example
A seller carries $250,000 at 7% on a 30-year schedule with a 5-year balloon. The buyer pays $1,663.26 a month. Over five years the seller receives $99,795 in payments, $85,124 of it interest, and then the $235,329 balloon.
Tips for buyers and sellers
- Buyers: make sure you can qualify for a refinance before the balloon. A balloon that comes due in a high-rate year can be hard to refinance. Negotiate an extension option in the note.
- Sellers: a larger down payment and a shorter balloon reduce your risk. Use a title company or attorney to draft and record the note and security instrument.
- Both: owner-occupied residential seller financing can fall under federal and state lending rules; get local legal advice.