Understanding Seller Carry Financing: What It Is, How It Works, and What To Consider Before Signing

Sometimes when you’re buying a home, getting a traditional mortgage isn’t an option or you want a lower interest rate. 

Before you give up on buying a home, consider the possibilities of seller carried financing — where the seller becomes your lender. 

Whether you’re a homeowner who’s ready to sell or a buyer searching for flexible financing options, understanding the basics of seller carry financing can be a game-changer in today’s intensely competitive real estate market.

We invite you to discover the concept of seller carry financing as we explore the benefits and potential impact for both buyers and sellers so you can make an informed decision about whether it’s the right option for you. 

Table of Contents

• What Is Seller Carry Financing?
• Seller Carry Back vs. Seller Financing
• How Does Seller Carried Financing Work?
• What Is Seller Carry Back Financing Normally Characterized By?
• What Are the Risks of Seller Carry Back?
• What Are the Potential Benefits of Seller Carry Back Financing?
• Precautions To Be Aware of as the Buyer and the Seller
• Let PEGGY HOAG REAL ESTATE Help You Find Your Next Home

What Is Seller Carry Financing?

Seller carry financing refers to when the property owner finances the property purchaser’s loan. 

With seller carry financing, the current property owner owns the property with no debt and becomes the lender for the home’s buyer. 

Seller carry financing is an attractive option for buyers who are unable to meet the requirements for obtaining a loan or do not want to pay the high interest rates. By the seller agreeing to take on the role of lender, the buyer is often able to bypass some of the criteria required for standard loans.

Seller Carry Back vs. Seller Financing

Seller carry back and seller financing are the same.

They refer to a loan from the current property owner and are also sometimes referred to as:

• Seller carry financing
• Purchase-money mortgage; or 
• Owner financing 
• Owner Carried Contract

Whether you’re looking to buy or sell, the professionals at PEGGY HOAG REAL ESTATE can assist you throughout the process. Call us today to learn more. 503-906-1370

How Does Seller Carried Financing Work?

With seller carry financing, the bank is not involved in the sale. All arrangements for the purchase are made between the buyer and the sellers.

The two parties draw up a contract sale or purchase note that establishes the:

• Interest rate
• Schedule of payments from buyer to seller; and 
• Consequences should the buyer default on their obligations

Unlike a sale that involves a mortgage, the principal is not transferred from the buyer to the seller. Rather, the buyer agrees to repay the amount over time.

What Is Seller Carry Back Financing Normally Characterized By?

Instead of the traditional monthly payment to a lender, the buyer pays the principal and interest payments directly to the seller, who takes on the role of the bank by carrying the mortgage on the property. These payments are typically processed through a note servicing company who distributes money to the seller, property taxes, property insurance etc…

With seller carry back financing, the seller doesn’t have a lump-sum payment but rather spaces payments out across the term of the loan.

Generally, seller carry financing runs only for a short term, such as five years. At the end of the term, the buyer pays a balloon payment to the seller. 

Ideally, seller carry back financing allows the buyer to accumulate equity in the home. At that point, the buyer can refinance their payment to the seller with a traditional lender.

What Are the Risks of Seller Carry Back?

With seller carry financing, there are potential drawbacks to consider, including:

• Fewer regulations to protect home buyers
• No home appraisal, so buyers may pay too much for the property
• Bigger down payment 
• Seller is at risk if the borrower defaults on payment

Another risk of sellers carry financing for the buyer revolves around the shortened amount of time to pay back the loan. Additionally, a significant balloon payment comes due after a few years. This one-time payment is required at the end of the mortgage. 

What Are the Potential Benefits of Seller Carry Back Financing?

There are also several benefits to seller carry financing, including: 

• Increased access to financing opportunities
• Ability to save on closing costs
• More flexible agreement terms
• The potential for no private mortgage insurance (PMI) premiums
• Can produce significant capital gains tax savings over time
• Higher return than savings, CD’s or Treasury Bonds
• Faster selling process
• Buyers can sell their property as-is without the need for repairs
• Option to sell the promissory note to an investor
• Faster and less expensive than a traditional sale since there is no waiting for the bank, appraiser, loan officer, legal department, and underwriter

Precautions To Be Aware of as the Buyer and the Seller

Seller Carry Financing as a Buyer

While there are many pluses to seller carry financing, there are additional factors to consider that may be potential risks, including:

• You may have to sell yourself to the property owner. If you do not qualify for a traditional mortgage, the seller will discover this when they check your credit history and other background data. If this is the case be prepared to provide the reasons for your failure to qualify, as well as your employment, assets, financial claims, and references. You’ll also want to point out any restrictions on your ability to borrow that the seller may not discover on their own. For example, you may have solid credit and a sizable down payment but have recently started a new business venture that keeps you from qualifying for a loan for up to two years.
• Currently you may expect better terms than you would get with a mortgage lender. You may potentially settle on a more favorable interest rate than banks are offering. But there is also the possibility of having to pay more since a seller is often less able to take on risk than a traditional lender. You’ll likely need to come up with a down payment that’s comparable in size to a typical mortgage — usually 20% or more of the property’s value.
• You’ll need to confirm that the seller is cleared to finance the transaction. If there’s a mortgage on the property, it can create complications. Seller carry financing is easiest when the seller owns the property outright. Don’t hesitate to pay for a title search on the property to confirm that the property is free from a mortgage or tax liens and to validate the accuracy of the deed.

Seller Carry Financing as a Seller

Sellers will want to keep the following in mind when they are considering financing the sale of a property:

• You aren’t required to finance long-term. As a seller, you’re free at any time to sell the promissory note to a lender or an investor. If you choose to do this, your buyer will send the payments directly to them. Sellers also have the option of doing this on closing day to receive cash immediately. However, you may reduce your profit since you will likely have to take less than the full value of the note to sell it, thus reducing your return on the property. According to Amerinote Xchange, promissory notes on properties generally sell for 65- 90% of face value.
• Include seller carry financing as part of your sales pitch. Advertise the fact that you’re offering this financing option in your property listing. Provide potential buyers an information sheet that lets them know the details of your financing arrangements.
• Get tax advice and consider loan servicing assistance. Seller carry financing may potentially pose tax complications, so include a tax expert as part of your team for the sale. Also consider enlisting the help of a loan-servicing company to issue statements, collect the monthly payments, and handle the other tasks involved in loan management.

Let PEGGY HOAG REAL ESTATE Help You Find Your Next Home

PEGGY HOAG REAL ESTATE is a luxury real estate broker in Portland, OR. 

With over 32 years of experience, our team has worked with thousands of clients throughout the greater Portland area, helping to create a smooth buying and selling process. 

Our focus is high-end real estate, including:

• Homes with gorgeous views
• Homes with indoor pools
• Large acreages
• Vineyards
• Horse ranches
• Income producing properties
• And more

While we have a luxury focus, we’re experts at helping clients buy and sell homes and properties of all types. 

Call the PEGGY HOAG REAL ESTATE today to find out more. 503-906-1370