Many people who offer owner financing plan to keep the note. Then life happens. They need cash, they inherit a problem, or they just get tired of chasing payments.
A note set up the right way can be sold later for a strong price. A note set up loosely can be hard to sell at all. Here's what makes the difference.
This guide is for sellers, and for the realtors and attorneys who help them.
Short version: Get a real down payment. Have a licensed loan originator (RMLO) check the buyer and set up the loan. Use a recorded mortgage or deed of trust, and have a licensed servicer collect payments from day one. Have an attorney or title company draft and close it.
The checklist
1. Get a real down payment
This matters more than anything else. A buyer with money in the deal is far less likely to walk away.
- 10% is the floor. 20% or more is better.
- Make sure it's their money, not a loan from someone else that they also have to repay.
2. Use an RMLO to check the buyer and set up the loan
This is the step I recommend most, after the down payment. An RMLO is a residential mortgage loan originator. They're licensed to set up home loans, and many will work with private sellers for a flat fee.
An RMLO will:
- Pull the buyer's credit and verify their income
- Document that the buyer can repay, the way federal rules expect
- Make sure the rate, terms, and disclosures follow federal and state rules
- Keep a file that proves it was all done right
That file matters when you sell. A note buyer wants to see that the loan was set up by the book. An RMLO-originated note is easier to sell and usually brings a better price. It also protects you if the buyer ever challenges the loan.
Some states require an RMLO for seller financing in certain cases. Texas is one where many sellers use one. Even where it isn't required, it's cheap insurance.
3. Charge a fair rate
A rate well below market makes the note worth less when you sell. A rate far above market can hit state limits or scare off good buyers. Ask your realtor or a local lender what's fair for owner financing today.
4. Make the payments pay down the loan
A note where each payment pays down the balance sells best. Interest-only notes and very long terms are harder to sell.
5. Think hard before adding a balloon
Balloons are common, but they come with risk if the buyer can't refinance. Federal rules also limit balloons for some sellers. If you use one, give it enough time, often five years or more. See selling a note with a balloon payment.
6. Use a recorded mortgage or deed of trust
A standard note and mortgage, or deed of trust, is the easiest to sell. Land contracts and contracts for deed can work too, but many states have strict rules for them. See the guides for Texas, North Carolina, and Ohio.
Whatever you use, record it with the county right away.
7. Close with a title company or attorney
Get title insurance for you as the lender. Have the documents drafted by a professional, not off the internet. Homemade paperwork is the top reason notes sell for less.
8. Use a licensed loan servicer from day one
A servicer collects payments, sends statements, tracks taxes and insurance, and keeps records. It usually costs about $20 to $40 a month.
When you go to sell, a buyer can trust the servicer's payment history right away. That's worth a lot more than a handwritten log.
9. Protect the property
- Be named on the insurance as the mortgagee or loss payee
- Make sure taxes get paid. Many sellers have the servicer collect an escrow for taxes and insurance.
10. Follow the licensing rules
Federal rules let most private sellers finance a small number of homes a year without a loan originator license, as long as the loan meets certain terms. Doing more deals, or using certain terms, can trigger licensing. State rules vary too.
Using an RMLO, as in step 2, takes care of most of this. I'm not a lawyer. Have a local real estate attorney check the deal before closing too.
What a note buyer will check later
When you sell, the buyer will look at the same things this checklist covers: the down payment, the payer's history, the rate, the paperwork, the recording, and the property. Every box you check now raises your price later.
Want cash at closing instead?
If your seller wants owner financing to attract a buyer but needs cash right away, a note can sometimes be sold at the same closing. Read seller financing for realtors.
Frequently asked questions
What down payment should I require with owner financing?
At least 10%. 20% or more makes the note safer and easier to sell.
Should I use a land contract or a mortgage?
A recorded mortgage or deed of trust is usually easier to sell. Land contracts work, but many states have strict rules for them.
Do I need a loan servicer?
You don't have to have one, but it helps a lot. It gives you clean records, and buyers trust them.
Can I sell my note later if I set it up myself?
Often, yes, but homemade paperwork usually lowers the price. Having an attorney or title company draft it pays for itself.
Do I need a license to offer seller financing?
Usually not for one or a few deals, if the terms follow federal rules. Do more, or use certain terms, and you might. The simple fix is to have a licensed RMLO set up the loan. Check with a local attorney too.
What is an RMLO, and do I need one?
A residential mortgage loan originator is licensed to set up home loans. They check the buyer and make sure the loan follows the rules. It's not always required, but I recommend one on every seller-financed home. It makes the note safer and easier to sell.
Have a note already? See what it's worth.
Larry has invested in real estate since 2006 and has bought more than 300 mortgage notes. He runs LJH Investments, LLC, an Ohio company based in Madison, Indiana. More about Larry
This article is general information, not legal or tax advice. Laws change. Talk with your own attorney and tax adviser about your situation.