Seller/Owner Financing

Seller financing, also known as owner financing, is when the seller of real estate allows a buyer to pay for all, or a portion, of the property by making installment payments to the seller over an agreed upon period of time. Instead of the buyer using a third party lender to provide all of the necessary funds for financing, the seller is extending credit to the buyer for some or all of the necessary financing for the purchase. This credit is a loan from the seller to the buyer, because the seller is conveying the deed to the property to buyer at closing, but the seller is not receiving the full purchase price at the time of the conveyance.

Seller Financing – Loan and a Lien

Similar to a third party mortgage lender, the seller will hold a promissory note as evidence of the debt owed from the buyer to the seller, and a deed of trust will be recorded as a lien against the property to secure the amount being financed.  (A deed of trust is often referred to as the mortgage, as most people are more familiar with that term. In North Carolina the security instrument most commonly used as a lien against real estate to secure a note is a deed of trust.) If the buyer defaults on this loan from the seller, the deed of trust will allow the seller to foreclose on the property to satisfy the debt.

Seller Financing May Be Used for a Portion of the Purchase Price

Seller financing can be used for a small portion of the purchase price in a situation where the buyer’s loan from a mortgage lender, plus any down payment funds, is enough to pay off any existing liens on the property, but insufficient to cover the entire balance of the purchase price.  In that instance, the seller can finance the difference. However, the seller’s deed of trust will be in second lien position, because the buyer’s primary mortgage lender will have a first lien on the property to secure its loan.  If the buyer defaults on its payments to the seller, and the seller forecloses on the property, that foreclosure sale will be subject to the primary mortgage lender’s deed of trust, which will remain a lien on the property.

Consequently, if no one buys the property at a foreclosure sale, the seller will obtain ownership of the property, but they will need to satisfy the debt owed to the mortgage lender to get its deed of trust released.  The seller may do this with cash, their own mortgage loan, or quickly selling the property to a new buyer.  If a third party purchases the property at the foreclosure sale, they would instead hold title to the property subject to the existing mortgage lender’s deed of trust, and have to satisfy that lender’s debt.

There is an additional risk to a seller that agrees to finance a portion of the purchase price for the buyer, and is secured by a deed of trust in second lien position, aside from the buyer defaulting on the seller’s loan.  Should the buyer default on the mortgage lender’s loan that is secured by a first lien position on the property, and that default results in a foreclosure, that foreclosure will extinguish the seller’s lien.

Seller Financing May Be Used for All of the Purchase Price

Seller financing may also be used for the entire purchase price, or the entire balance of the purchase price after applying any funds put down by the buyer. This financing arrangement is only likely if there is no deed of trust encumbering the property. If there is a deed of trust on the property, and the buyer is not putting enough money down to pay off it off, seller financing the balance is problematic.  This is because most deeds of trust in North Carolina contain a “due on sale” clause. This clause prohibits title to the property from being transferred while the deed of trust remains a lien. If title is transferred, it allows the lender to exercise its right to accelerate the debt and foreclose.

Long or Short Term Creative Financing Solution

When a buyer is having difficulty obtaining traditional financing, or unable to obtain a loan for the entire balance of their purchase, seller financing may be an option. While a seller may agree to finance the purchase for as long as a traditional lender, such as 20 or 30 years, sellers are more likely to offer this financing as a short term loan. This short term, such as 5 years for example, will allow the buyer time to possibly refinance the property with a more conventional mortgage lender, or otherwise obtain the funds necessary to pay off the seller for their purchase.