What is seller financing?

Sometimes a seller may act as a lender and provide the buyer with the financing for their home purchase.  While rare today, this arrangement was more common in the past, particularly in rural and farming communities where the deals were known as “land contracts”.  The seller would hold the note on the home in exchange for regular payments until the parameters of the agreed upon sale were satisfied at which point the deed was transferred to the buyer. These arrangements are experiencing a new life with the advent of the rent-to-own and shared-equity models of home buying.

Advantages of seller financing for homebuyers

Seller financing works well when the two parties know and trust each other and when the parameters of the sale and agreement to repay are clearly spelled out and in contract. These arrangements can be tailored to unique circumstances, revised over time, and may save money over a traditional lending arrangement.

Disadvantages of seller financing for homebuyers

Seller financing does not share all the consumer protections embedded in traditional mortgage lending. Land contracts and seller financing agreements have been abused to the detriment of buyers. In some instances, the seller would require repairs be made by the buyer or not credit monthly payments toward the buyer’s debt.  Worse, sellers have been known to rush buyers to foreclosure for missing payments and not crediting them with accrued equity, maintenance, or improvements on the property made while under contract.

Seller financing is subject to licensing and regulations that are important for real estate agents to understand. Learn about the rules for seller financing homes listed below in the Advocacy section.