What Is Seller Financing and Should I Consider It When I Buy?

Instead of borrowing everything from a bank, you sign a promissory note to the seller and the seller records a deed of trust against the home, much like a bank would. You pay the seller over time on agreed terms. Sometimes the seller carries the whole loan. More often, the seller "carries back" a second loan behind a bank loan.

I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. When seller financing comes up, my first step is to slow down and look at every term, because these deals are custom and the details matter.

This is general information, not legal, tax or lending advice. A real estate attorney and a CPA should review any seller financing offer.

Seller financing can help when:

• A bank loan is hard to get right now, such as with a short work history.
• The seller owns the home free and clear and wants monthly income instead of a lump sum.
• You need a smaller second loan to bridge a gap with a bank loan.

It is not automatically cheaper. The interest rate, down payment and term are all negotiated.

A disclosure statement. California Civil Code section 2956 and the sections after it require a written disclosure in many seller-financed purchases of a home of up to four units when an arranger of credit, such as a real estate agent, is involved. It covers the loan terms and information about the buyer's credit.

Balloon payment notice. Civil Code section 2966 requires the holder of certain seller-financed notes with a balloon payment to send written notice no less than 90 and no more than 150 days before the balloon is due.

Federal rules for sellers. The Consumer Financial Protection Bureau's Regulation Z, section 1026.36, lets certain sellers finance a limited number of properties in a 12-month period without being treated as a loan originator, if the financing meets conditions. These include a fixed rate or an adjustable rate that adjusts only after five or more years. For a seller financing three or fewer properties, the financing must be fully amortizing and the seller must determine in good faith that you can repay.

State tax withholding. The Franchise Tax Board's Form 593 instructions say that in an installment sale, buyers are required to withhold on the principal portion of payments made after closing, unless the seller has an approval to elect out. Your escrow officer and CPA can explain how this applies.

1. The balloon payment. Many seller loans are short and end with a large final payment. If you can't refinance in time, you could lose the home.
2. The seller's own mortgage. Federal law, 12 U.S.C. section 1701j-3, allows lenders to enforce due-on-sale clauses, which give the lender the option to call its loan if the property is transferred without its consent. If the seller still owes on a loan, ask an attorney how that is handled.
3. Title and recording. Make sure the sale goes through escrow, title insurance is issued, and your deed and the seller's deed of trust are properly recorded. My article on taking title explains how you can hold title.
4. Missing protections. A private seller is not a bank. Read every term on late fees, prepayment and default.

My article on assumable mortgages explains another way buyers sometimes take on existing financing.

• What is the interest rate, term and payment?
• Is there a balloon, and when is it due?
• Does the seller have a loan on the home today?
• Is the loan fully amortizing?
• Can I pay it off early without a penalty?
• Will escrow and title insurance be used?

If a seller has offered to carry financing, I'd love to help you think through the terms and bring in an attorney and lender so you can decide with clear eyes. Call or text me at 714.366.8575 | DRE: 01397168, or contact me. Jeanette Nelson is a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas.