What Is Seller Financing?
Seller financing means the seller acts as the lender. You make a down payment, then pay the seller monthly (or on another schedule) until the loan is paid off. It's useful when you can't qualify for a conventional mortgage or want a faster close. Terms are negotiable—interest rate, payoff period, and whether there's a balloon payment at the end. The seller keeps a lien on the property until you've paid in full.
Seller financing is a loan provided by the property seller to the buyer, bypassing traditional lenders—the buyer pays the seller directly over time instead of a bank.
At a Glance
- What it is: The seller lends you money to buy their property instead of you getting a bank loan.
- Why it matters: You can close without lender approval, often with more flexible terms than a conventional loan.
- How to use it: Negotiate down payment, interest rate, term length, and balloon (if any) with the seller.
- Common terms: 5–10 year payoff, 5–8% interest, 10–30% down, balloon payment at end in many deals.
How It Works
Step 1: Negotiate the deal. You and the seller agree on purchase price, down payment, interest rate, and repayment schedule. Unlike a bank, the seller can set whatever terms both parties accept—within legal limits.
Step 2: Sign the promissory note and deed of trust. The note spells out how much you owe, the interest rate, and when payments are due. The deed of trust secures the loan against the property so the seller can foreclose if you default.
Step 3: Make payments to the seller. You pay the seller directly each month (or on whatever schedule you agreed). Some sellers use a servicing company to collect payments and handle paperwork.
Step 4: Handle the balloon (if there is one). Many seller-financed deals include a balloon—a large final payment due after 3, 5, or 10 years. At that point you either refinance with a traditional lender, pay it off with cash, or negotiate an extension.
Seller financing doesn't replace equity math—you're still building ownership as you pay down principal. It just changes who holds the note.
Real-World Example
Phoenix duplex, 2024.
A seller had a $340,000 duplex with two units renting for $1,450 each. The buyer couldn't qualify for a conventional loan (DTI too high from other properties) but had $68,000 for a 20% down payment. They agreed to seller financing: 6.5% interest, 10-year term, $2,040/month payment, with a $245,000 balloon due at year 10. The buyer closed in 12 days—no appraisal, no underwriting. The seller got a steady 6.5% return and deferred capital gains by spreading the sale over the note term.
Pros & Cons
- Close without lender approval—no credit check, no DTI ratio limits.
- Faster closings (often 1–2 weeks vs 30–45 days for conventional).
- Negotiable terms—rate, down payment, and payoff schedule.
- Can work when banks say no (self-employment, too many properties, recent credit events).
- Seller may accept a lower rate than current interest-rates if they want to move the property.
- Seller may charge a higher rate than conventional loans to compensate for risk.
- Balloon payments can force a refinance or sale at an inconvenient time.
- Payments often don't report to credit bureaus—you won't build credit history.
- Fewer legal protections than with a regulated lender; some sellers foreclose quickly after one missed payment.
- If you default, you lose the property and any equity you've built.
Watch Out
- Documentation risk: Get a proper promissory note, deed of trust, and title insurance. Handshake deals blow up when someone dies or disputes the terms.
- Balloon risk: Model what happens when the balloon comes due. If rates are 8% and you can't refinance, you're stuck.
- Seller default risk: If the seller has a mortgage with a due-on-sale clause, their lender could call the loan when they "sell" to you—even on an installment sale. Verify their loan terms.
- Exit risk: Selling before the note is paid off requires the buyer to assume your obligation or the seller to get cashed out. Not every buyer wants to take over seller financing.
Ask an Investor
The Takeaway
Seller financing is a powerful tool when banks won't play—faster closes, flexible terms, and a path to ownership without traditional underwriting. But the devil's in the details: get everything in writing, plan for the balloon, and make sure the seller's own loan doesn't have a due-on-sale clause that could blow up the deal.