Seller Financing Explained

In a seller-financed (owner-financed) sale, the seller plays the role of the bank. Instead of the buyer bringing a mortgage from a lender, the buyer signs a promissory note directly to the seller, secured by a deed of trust or mortgage on the property. The buyer gets financing they might not qualify for elsewhere; the seller gets a stream of interest income and often a better total return than a cash sale.

The typical structure

Most owner-financed notes follow the same recipe: 5–20% down, a rate 1–3% above bank mortgage rates, payments calculated on a 20–30 year amortization to keep them affordable, and a balloon due in 3–10 years. The balloon is the key compromise: the buyer gets low long-amortization payments, and the seller gets full payoff within a reasonable horizon when the buyer refinances or sells.

What the seller earns

Two numbers matter: total interest collected through the balloon, and the effective yield (IRR) on the note. On a $315,000 note at 7.5% amortized over 30 years with a 5-year balloon, the seller collects roughly $115,000 in interest in five years and then a ~$298,000 balloon payoff. The seller financing calculator computes both, plus a clean deal-summary card you can share with the other party.

Legal guardrails

Owner financing to a buyer who will occupy the home can fall under Dodd-Frank ability-to-repay rules; many states also cap rates or require specific disclosures. Use a licensed loan originator where required, record the security instrument properly, and consider a neutral servicer to collect payments and maintain records. None of this is optional in a well-structured deal — and none of this article is legal advice.

When the seller still owes on the property

If the seller has an existing mortgage, a plain owner-finance note gets risky — the sale can trigger the due-on-sale clause with nothing structured around it. The standard answer is a wraparound: read What Is a Wraparound Mortgage? and model it with the wraparound calculator.