Seller Financing for Real Estate: Complete Guide

In a seller-financed purchase, the seller acts as your lender: you pay a down payment, sign a promissory note for the rest of the price, and the seller records a mortgage or deed of trust against the property until you pay it off. Title passes to you at closing. The down payment, rate, and term are all negotiated, and the note may end in a balloon payment (the remaining balance due in one lump sum) that you must refinance or pay in cash. Before you agree, find out whether the seller still has a mortgage, because that lender can demand full payment when the property is sold.

For how seller financing fits with bank loans and DSCR loans (loans approved on the property's rent instead of your income), see tips for getting approved for an investment property mortgage.

How the down payment, rate, term, and balloon are set

No agency publishes standard seller-financing terms. Each one is a trade between what the seller needs and what you can carry.

• Down payment. If you default and the seller forecloses, the down payment plus any rise in value is what protects the seller's unpaid balance. A larger down payment is your main tool for asking a lower rate.
• Interest rate. The tax code sets a minimum in effect. If the note's rate is below the applicable federal rate (AFR), the IRS treats part of each principal payment as interest, which changes the seller's tax. For November 2026, the annual AFR is 4.67% for a note of 3 years or less, 5.08% for over 3 and up to 9 years, and 5.52% for over 9 years. The IRS test uses the lowest AFR in the 3 months ending with the month you sign the binding contract or the month of sale, whichever is lower, and the term category is based on the note's average time to repayment rather than its final due date. Have the seller's tax preparer confirm the rate before you sign. For 2026, when the seller-financed amount is $7,462,600 or less, the IRS test rate never exceeds 9%. Your state's usury law, where one applies to a seller's note, sets the maximum rate.
• Amortization and balloon. Payments are often figured over a long schedule, such as 30 years, while the balance comes due much sooner. The note should state the maturity date, any extension option and its fee, and that you can prepay without penalty.

Worked example. You buy a fourplex for $300,000 with $30,000 down. The seller carries a $270,000 note at 7%, with payments figured over 30 years and a balloon at year 5.

• Monthly principal and interest: $1,796
• Balance due at the 5-year balloon: about $254,155
• With a 7-year balloon instead: about $246,098

Start lining up the refinance at least 6 months before the balloon date. Lenders appraise the property and review its rent history, so the balloon date should leave time for both. Refinancing an investment property covers what lenders look at.

The documents and who services the loan

1. Purchase contract with a financing addendum listing every note term.
2. Promissory note signed by you, or by your LLC with your personal guaranty (your promise to repay if the LLC does not).
3. Mortgage or deed of trust, recorded with the county, giving the seller the right to foreclose if you default.
4. Deed transferring title to you.
5. Title insurance. An owner's policy for you and a lender's policy for the seller. A lender's policy covers only the loan, not your equity.
6. Insurance on the property naming the seller as mortgagee, the secured lender on the policy.

Use a third-party loan servicer. It collects your payment, keeps the payment history and balance, sends year-end interest statements, and can hold an escrow account for property taxes and insurance. Its records are what a refinance lender will ask for, and it gives both sides a neutral record if a payment is disputed.

When the seller still has a mortgage

Ask the seller for a copy of the mortgage or deed of trust and look for a due-on-sale (transfer) clause. If it has one, the federal Garn-St Germain Act lets the lender enforce it when the property is transferred without its approval. The Act's exceptions cover transfers such as those to a spouse or children, at death, or into a living trust, not a sale to an investor. You have three options:

• Pay off the seller's loan at closing from your down payment and the seller's proceeds. This works only when the seller's loan balance is smaller than your down payment plus what the seller can bring.
• Get the seller's lender to consent in writing. Expect it to want payment in full or a formal assumption instead. See loan assumptions.
• Use a wraparound note. You sign one note to the seller for the full financed amount, and the seller keeps paying the original loan from your payments.

Wraparound example. The seller owes $150,000 at 4% to a bank with 25 years left, a payment of about $792 a month. You sign a $270,000 wraparound note to the seller at 7% over 30 years, a payment of $1,796. The servicer sends $792 to the bank, and the seller keeps about $1,004 a month. The risks are that the bank calls its loan due because of the sale, or the seller stops paying the bank while you keep paying the seller. If the bank forecloses, your deed is subject to its lien.

To limit those risks, have the servicer pay the underlying lender directly from your payment, get a copy of each underlying statement, and put your right to cure a missed underlying payment and deduct it from your note in writing. Buying while the seller's loan stays in place carries the same lender risk as subject-to financing.

When federal loan-originator rules apply to the seller

When you buy a rental you will not live in, federal Truth in Lending rules treat the loan as business credit. Regulation Z, including its seller-financing limits, does not apply. The exception is a 1 or 2 unit property you plan to live in for more than 14 days in the coming year, where the purpose of the loan has to be weighed case by case.

The rules matter when the buyer will live in a 1 or 2 unit home (financing to buy a 3 or 4 unit building is business credit even if the buyer lives in one unit), including when you later sell one of your own rentals to a homeowner with seller financing. A seller who finances a home for a buyer who will live in it is treated as a loan originator under the federal rules, with the loan originator compensation and qualification rules that come with that, unless it meets one of two exclusions:

In both, the seller must own the property, and the exclusion does not cover a builder who constructed a home on it in the ordinary course of business.

Why the seller agrees: installment sale treatment

When the seller receives at least one payment after the year of sale, the IRS installment method lets the seller report the gain as principal arrives instead of all at once. A fixed share of each principal payment, the gross profit percentage, is taxable gain reported on Form 6252. Two parts are not spread out: depreciation recapture taxed as ordinary income is reported in full in the year of sale, and the interest you pay is ordinary income to the seller each year. Installment sales walks through the seller's math.

If you default and the seller takes the property back, special repossession rules limit the seller's taxable gain to the gain not yet reported, minus repossession costs. You can find the overview of the other methods in creative financing strategies.