If you’re having trouble qualifying for a traditional mortgage loan, you have other options. One solution could be to finance a loan through the home’s seller, negotiating an agreement to pay them the money that ordinarily would go to the bank.
Although this type of financing can be quicker than the traditional mortgage process, there are important steps sellers and buyers should take to ensure their interests are protected.
What Is Seller Financing?
Seller financing, sometimes called owner financing, is when the seller takes on the role of lender, working directly with the buyer to finance the purchase of the home. Requirements for how this works are different across the country, as each state is responsible for regulating these transactions.
A typical seller-financed arrangement is known as a land contract, also called a contract for deed. In this type of deal, the seller retains the legal title and still owns the property, while the buyer gains a financial interest in the property, known as equitable title, by making regular payments. The buyer pays the seller rather than a bank or credit union, and earns the legal title once all terms of the loan are met.
Land contracts are typically much shorter than a 15- or 30-year mortgage. The agreements are often for five years or less, says Erica Crohn Minchella, a real estate attorney in Skokie, Illinois. At the end of the land contract, a balloon payment is typically due to pay off the balance of the loan. For the land contract, the buyer and seller will have to negotiate the terms of a promissory note, which will include the sale price, down payment and interest rate, like a typical home purchase contract.
“A well-crafted contract for deed will allow payments made each month to go toward some principal,” Minchella says. The buyer could then use the equity they’ve earned and find a lender to agree to a refinance arrangement to buy the home outright.
[Read: Best Mortgage Lenders]
In some contracts, buyers could have an option to sell the property after they fix it up, Minchella says. “The beauty of these transactions is that you can craft them any way you want,” she adds. “There is a lot of flexibility.”
Land contract agreements are often made between family members or friends, says Bryan Zuetel, a real estate attorney, broker and investor in Orange County, California.
It’s best if the seller financing a home owns it free and clear, or has a “minimal loan that could be paid off by the buyers putting a down payment on the property,” Zuetel says. “It’s not applicable to properties with minimal equity or properties where the seller is looking to cash out of the real estate market and be done.”
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When Is Seller Financing Best?
Here are a couple of examples of how seller-financed arrangements could benefit both parties:
Save time and money
Buyers and sellers who know each other very well — such as parents and children — might want to skip the extensive documentation and costs of a typical mortgage and handle it on their own. Although a high degree of trust and care is needed in these situations, both sellers and buyers could enjoy a quicker closing process, low closing costs and no ongoing fees or charges from lenders.
Urgent need for repairs
A seller who doesn’t want to make repairs to a home that would help it pass a Federal Housing Administration or Veterans Affairs pre-financing inspection might look for a buyer who will make the repairs. This could happen in an estate sale if a home wasn’t kept up before the homeowner died, and the children who inherited the house know it needs extensive repairs before it goes on the market.
“A seller who can’t do that now has a solution,” Minchella says. The buyer could make the repairs and have a better chance at getting a mortgage or selling and pocketing the increased value of the home.
The Pros and Cons of Seller Financing for Sellers
[Read: Best Mortgage Refinance Lenders.]
The Pros and Cons of Seller Financing for Buyers
Take These Steps Before Opting for Seller Financing
Here are a few steps buyers and sellers should take before entering into an owner-financed property arrangement:
Hire an Attorney
At least one real estate attorney should be part of the transaction, possibly one each for the buyer and seller. The attorney will prepare necessary documents, obtain proper signatures and disclosures, have documents recorded correctly, and “make sure both sides are informed of their rights and obligations under this legal arrangement,” Zuetel says.
Specify Payments
Either the buyer or seller will need to pay property taxes, and one of the parties will need to hold an insurance policy on the home. All of that and more needs to be spelled out in the contract, along with the consequences if the buyer skips payments.
“Don’t allow missed payments to stack up from the buyer regardless of what the excuse is,” Zuetel says. “Exercise your rights earlier rather than later.”
[SEE: Best Home Equity Loans]
Get to Know the Other Party
Buyers will need to make sure the mortgage is paid off and that there are no liens on the property, as either could delay or prevent an eventual final sale to the buyer. Sellers will need to be assured that buyers will make mortgage payments as required and keep up the home. Minchella recommends doing a credit check and confirming the buyer is employed.
Even if they know each other, each party needs to understand the seriousness of the deal.
“It’s not as if it’s some kind of easygoing handshake arrangement,” Zuetel says. “If it’s done correctly, it is a legal arrangement, and the buyers could be foreclosed on by an individual seller just like a bank could.”
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originally appeared on usnews.com
Update 11/13/25: This story was previously published at an earlier date and has been updated with new information.
