What is seller financing, and when does it make sense?

What you'll learn

• What is seller financing - and how does it all work?

• The different types of seller financing arrangements

• The good and the bad for buyers and sellers

• How seller financing compares to conventional mortgages

Are you having trouble qualifying for a traditional mortgage, or are you a seller who wants to close faster and get a bit more money out of the deal? Seller financing could be the answer to your prayers. This alternative arrangement lets property owners act as their own bank - extending credit directly to buyers, rather than relying on the usual financial institutions.

Seller financing creates opportunities for buyers who may not qualify for a mortgage - while also giving sellers a chance to get a better price for their property and make some extra money from interest payments. The property owner becomes the lender, cutting out the middleman and giving both parties a much more direct relationship.

These types of deals usually come with terms of 3 to 7 years and interest rates between 6% and 10%. Now, those rates might be a bit higher than traditional mortgage rates - but they often come with much more flexible qualification requirements and lower down payments. For buyers who are having trouble with credit or don't quite have the financial profile to qualify for a traditional mortgage, seller financing can be a real lifesaver.

Of course, there are some downsides to consider. Sellers are taking on the risk of the buyer defaulting on their payments, while buyers might face higher interest rates or some large balloon payments at the end of the term. Whether you're a buyer looking for a different way to get into a home, or a seller looking to get the best deal you can, understanding seller financing is key to making smart decisions about your real estate future.

...in as little as 3 minutes – no credit impact

What is seller financing?

Seller financing is an arrangement where the property owner acts as the lender, cutting out the traditional financial institutions and providing an alternative way to get into a home. This is also known as owner financing or a purchase-money mortgage — and it basically lets the seller become the bank.

The whole thing centers around a promissory note that the buyer signs, which lays out the terms of the repayment. Both parties get to decide on things like the down payment, interest rate, repayment schedule and how long the loan is for. 

What documentation do you need?

When you're setting up a seller-financed deal, you're going to need some pretty specific documentation to protect both parties. This includes things like the purchase price, interest rate, how the payments will be amortized, the payment dates, how long the loan is for, and what happens if the buyer defaults. You also want to make sure you're clear on things like property taxes and insurance to avoid any future disputes.

Most of these deals are pretty short — usually only 5 to 10 years — and they often end with a pretty big balloon payment. This gives buyers some time to get their finances back on track before they have to come up with a big chunk of cash to pay off the rest of the loan.

Why seller financing could be a good idea

The flexibility of seller financing is one of its biggest selling points. When traditional lending isn't an option, this type of arrangement can be a real game-changer. When you're dealing with a seller who you know, it's a lot easier to get through the process — and that's especially true when conventional loans just aren't an option.

One of the best things about seller financing is that the property itself is collateral — so if the buyer defaults, the seller gets to keep the property. That's a pretty big safety net.

How does seller financing work?

Seller financing is basically just a more direct way of doing a mortgage  without involving any of the usual financial institutions. The buyer and seller work out all the details, from the purchase price and down payment to how the payments will be structured and how long the loan will run for.

The buyer signs a couple of documents to make it all official - a promissory note and a mortgage or deed of trust. The promissory note lays out the repayment terms and payment schedule while the mortgage or deed of trust secures the property as the collateral.

Unlike a traditional mortgage, seller financing doesn't involve any kind of upfront funding from a bank - the buyer just commits to making payments to the seller over time. This means that are very rarely any closing costs, making the barrier to entry of homeownership even lower.

Most seller-financed deals are a lot shorter than a traditional 15-30 year mortgage  and they often end with a pretty big balloon payment. That gives buyers some time to get their finances back in order before they have to come up with a big chunk of cash to pay off the rest of the loan.

The closing process is pretty standard, but there's one key difference: the seller gets to collect payments from the buyer over time, rather than getting the full purchase price all at once. And through the mortgage or deed of trust, the seller gets to keep a security interest in the property so they've got the right to foreclose if the buyer defaults on their payments.

Types of seller financing

There are a few different types of seller financing arrangements and each one is designed to meet the needs of a particular buyer or seller. Understanding your options can really help you figure out what will work best for you.

Land Contracts are probably the most straightforward type of seller financing deal. The buyer makes regular payments to the seller over a set period of time, but the property title stays with the seller until the final payment is made. This is a good option for buyers who can't get a conventional loan because of their credit or income, but want to get into a home anyway.

Mortgage/promissory note arrangements are when the seller will hand over the property title to the buyer at closing, but also include a mortgage or deed of trust on the property at the same time. The buyer then follows the payment schedule outlined in the promissory note, taking ownership of the property straight away, but the seller gets to keep their side of the deal secure with a lien they put on the property.

Lease-purchase agreements combine renting with the possibility of becoming a homeowner further down the line. TThese start out like any regular rental, but include the option to buy the property after a set period has passed. Sometimes, buyers can earn rent credits towards their eventual down payment, which can make this sound a lot like rent-to-own arrangements that can actually help people get into a house.

All-inclusive trust deeds (AITDs) are a solution for sellers who still owe money on an existing mortgage. When a buyer makes a payment to the seller, the seller goes ahead and services their original loan. If the new interest rate they've got is higher than their existing mortgage rate, they get to keep the difference as extra cash.

Each of these options affects closing costs in different ways, and will have an impact on your long-term financing strategy. The right choice will depend on your timeline, what you're trying to achieve, and how much risk you're willing to take.

Seller financing pros and cons

Deciding whether seller financing is the way to go for you is really a matter of weighing up the advantages and disadvantages. This alternative to conventional loans can offer some unique opportunities, but there are risks for both buyers and sellers.

Seller financing pros

Faster sales process: One of the benefits for sellers is that they can close deals a lot quicker with seller financing, because the transaction skips the normal bank underwriting and approval process. This can be a big help in competitive markets.

An extra income stream: For a seller, seller financing can provide an ongoing income stream which often provides a better return than other investments. For a $400,000 property financed at 8% interest, the seller could earn $32,000 in interest income per year.

Properties sell for a higher price: When you offer seller financing, properties often command a higher price because of the more flexible terms. Buyers will often pay more for the convenience and accessibility of this alternative financing.

Tax benefits: Sellers can spread out capital gains over a number of years because they report income as it's received each year. This can help them reduce their tax liability.

Sell "as-is" properties: With seller financing you can sell properties in their current condition without having to worry about doing any expensive repairs.

Seller financing can also be a good option for buyers who traditionally might struggle to get approved for a conventional loan:

Lower down payments: Sellers often accept lower down payments than the traditional 20% required for a mortgage.

Lower closing costs: Buyers don't have to deal with the usual lender fees, origination charges and other costs, which can be a real plus.

More flexible qualification: Working directly with the seller can be less of a hassle for buyers with less-than-perfect credit.

With Better, you can get the best of both worlds. With our tech, we're able to close faster than industry average, and our array of loan types and down payment requirements can let you get into a home with as little as 3% down. Start your pre-approval to find out what you can afford in as little as 3 minutes, with no credit impact.

...in as little as 3 minutes – no credit impact

Seller financing cons

Default risk: Sellers have to live with the risk that the buyer might default on the payments, which could lead to a costly and time-consuming foreclosure. This risk can keep them tied up in the property for longer.

Still tied to the property: Sellers have to stay connected to the property for the whole repayment period, which can make it harder for them to plan their own finances.

Higher interest rates: Buyers will often have to pay higher interest rates than they would with a traditional mortgage, which can increase their overall cost of owning the property.

Pressure from balloon payments: Seller financing often involves a big balloon payment at the end, which can put pressure on the buyer to get a new mortgage or pay off the balance in full.

Complicated legal side: You need to get the title transfers and loan terms sorted out carefully, or you might end up with disputes in the future.

Less regulation and protection: Seller financing often doesn't have the same level of consumer protection as a traditional mortgage, which can leave buyers at risk of getting a bad deal.

The decision to go with seller financing will depend on your individual circumstances and the level of risk you're happy to take on. Buyers will need to think about their ability to meet their obligations when the balloon payment comes due, while sellers will need to consider how comfortable they are with the idea of lending money to someone.

If you're looking for the speed and ease of seller financing, without all the risk, consider getting pre-approved with Better. You can find your homebuying budget in as little as 3 minutes with no impact to your credit score. 

Conventional mortgage vs seller financing

Understanding the difference between conventional mortgages and seller financing can really help you make a decision about which option is best for you. These financing methods work in fundamentally different ways, affecting everything from qualification requirements to how long it takes to complete the transaction.

Lender structure is the main difference. Conventional loans involve a third party financial institution acting as the lender, whereas with seller financing the property owner is acting as the lender. This difference is going to affect nearly every part of the transaction.

Qualification requirements for the two options are night and day. Traditional loans enforce pretty strict criteria, such as credit scores, income verification and debt to income ratios. Seller financing qualification is up to the seller, who can offer a lot more flexibility to buyers who wouldn't normally qualify for a conventional loan.

Interest rates and terms are another key difference. Conventional financing usually comes in with lower interest rates, sometimes by a few percentage points. Conventional loans also have longer repayment terms — 15 or 30 years — compared to the shorter 5-10 year terms you'll often see with seller financing.

Closing speed and costs can be a lot faster and cheaper with seller financing. It skips out on the time-consuming underwriting procedures, and buyers don't have to worry about the loan origination fees and other banking expenses that come with traditional lending. 

With Better, you can enjoy fast speed and lower costs. Our tech helps us close faster than industry average and cut out unnecessary fees so you have all the security of a traditional mortgage without the antiquated systems that usually come along with it.

Negotiation flexibility is a key part of the appeal of seller financing - a major distinction from conventional loans. With a conventional loan, lenders set terms pretty rigidly, giving you very little wiggle room. But with seller financing, you can negotiate just about any aspect, like down payment, interest rate, payment schedule, and more.

Want to get a better idea of what to expect when buying a home? Our mortgage calculator is a great tool to get started with. Try it out and see how different options compare.

Seller financing FAQs

When it comes to seller financing, people often have a lot of questions. And for good reason - this is a pretty big departure from conventional loans. So here are some answers to help clarify some of the key points.

How do all these terms — purchase-money mortgage, seller financing, owner financing — fit together?

The truth is, these terms are all just different ways of saying "a loan from the seller to the buyer". A purchase-money mortgage is just another name for the same basic concept - a loan provided by the seller to help the buyer buy a property. And in the real estate business, we tend to use all these terms interchangeably - they all get at the same basic idea. The property seller is acting as the lender here, cutting out the need for a bank or other financial institution.

Is seller financing right for you?

That depends on your situation. Buyers with credit problems or who don't quite fit the traditional lender mold often find that seller financing is a way in where conventional lenders would shut them out. And for sellers, it can be a nice way to get a higher sale price and a steady stream of income from interest payments.

If you want the flexibility of seller financing, but need less stringent rules and requirements, Better has loan products that can work for a credit score as low as 580. See what you can get pre-approved for in as little as 3 minutes with no impact to your credit score.

Who owns the title in a seller-financed deal?

The answer really depends on the specifics of your financing arrangement. Most of the time, the seller is still holding onto the title until the buyer has paid off the loan. Once all the payments are made and the loan is satisfied, the seller transfers the title over to the buyer. This is a pretty standard arrangement. It protects the seller by giving them a stake in the property (via the loan) that they can use to recoup their losses if the buyer defaults.

That said, there are some other types of financing arrangements out there, like traditional mortgage/promissory note structures, that transfer the title over to the buyer right at the beginning, and then use a deed of trust to secure the loan. The specifics of your agreement will determine the exact details.

Want to know more about property ownership concepts? Check out our guide on title vs. deed differences for more information.

Take control of your home financing options

The beauty of seller financing is that it offers a way out for buyers and sellers who need a little more flexibility than a traditional mortgage can provide. Whether you're a buyer who's struggling to qualify for a loan or a seller who wants to get a higher price for your property and some regular income from interest payments, seller financing gives you options.

But it's worth keeping in mind that this flexibility comes with some tradeoffs, like the possibility of shorter loan terms or balloon payments down the line. And both parties need to be aware of the legal complexities involved. So before you start exploring your options, do some research to get a sense of what's involved. 

You can also explore Better, a lender built around the consumer to deliver a faster, easier, and more affordable way to buy a home across a variety of financial profiles and circumstances.

Want to see what you can get pre-approved for? Complete our pre-approval application and find out in as little as 3 minutes, without impacting your credit.

...in as little as 3 minutes – no credit impact

Not ready to take the leap? Check out today's rates or play with our mortgage calculator to start understanding what you can afford.