Common Real Estate Agent Questions Surrounding Seller Financing

Shifting markets, rising interest rates, and banks tightening their loan qualifications lead many buyers (and sellers) to seller financing.

Before we deep dive into why so many real estate agents have added seller financing to their toolbox, let me address the elephant in the room…

…YES, real estate agents still earn their full commission (and sometimes even more). But before we go into that, let’s cover seller financing in general and why it has grown. 

Even with a decline in the real estate market, the number of owner finance notes increased by 8% in dollar volume in 2024. And it’s for good reason! Seller financing offers buyers and sellers alternative solutions to purchase and sell their properties, which is why many real estate agents will come across an owner financing deal in their career.

Yet, many agents are left with questions about how seller financing works, its benefits, and how to qualify buyers effectively. Understanding the basics can help you better serve your clients and close deals more confidently if you’re navigating this lesser-known but powerful tool.

What Is Seller Financing?

Owner Financing, or seller financing, makes the seller the bank. Instead of receiving a traditional mortgage from the bank, the seller agrees to accept payments over time for their property.

These deals involve a promissory note outlining the loan amount, interest rate, payment schedule, and consequences of default.

There are several forms of documentation for seller financing, including:

• Promissory Note with Deed of Trust
• Promissory Note with Mortgage
• Land Contract (Contract for Deed)

Each method has legal and financial implications, so it’s critical to understand your state’s specific regulations and disclosure requirements.

Benefits of Seller Financing

For Sellers:

• Faster Closing Process: Without bank underwriting, closings can happen more quickly.
• Potential for Higher Sale Price: Sellers often have leverage to negotiate better terms.
• Income Stream: The seller earns interest on the loan, often more than traditional investments, backed by real estate.
• Expanded Buyer Pool: Buyers who may not qualify for a traditional mortgage due to credit or documentation issues are still potential candidates.

For Buyers:

• Flexible Terms: Interest rates, payment structures, and repayment timelines can be tailored.
• Lower Closing Costs: Fewer fees and no bank requirements translate to less money upfront.
• Easier Qualification: Seller criteria can be more lenient than those of traditional lenders.
• Opportunity for Ownership: Allows self-employed or credit-challenged buyers to become homeowners.

Common Questions Real Estate Agents Have

Is seller financing legal in all states?

Yes! Keep in mind that the rules do vary state-by-state. Some states have more stringent laws about disclosures, interest caps, and financing structure.

How do I write and qualify an offer that includes seller financing?

Utilize resources available, like an attorney and an RMLO! They can help dial in your paperwork and note structure to keep it compliant and a winning offer!

If you’re ready to gain the skills to create notes yourself, check out our Creating Notes Master Class!

What terms are negotiable?

Virtually all aspects can be negotiated, including the interest rate, down payment, loan duration, and balloon payments. Flexibility is a significant benefit of utilizing owner financing.

Do agents still earn a commission?

Yes. Commissions are usually paid at closing, like any other deal, though agents should clarify terms with their broker and clients early. There will need to be sufficient cash brought to closing to cover typical closing costs including the commission.

How do I explain seller financing without giving financial advice?

Stick to the facts. Let clients know the basics, highlight potential pros and cons, and refer them to qualified financial or legal professionals for detailed guidance.

What if the note holder gets tired of receiving payments?

They can sell them! If the holder needs cash now or is tired of the hassle of monthly payments they can sell their note (or part of their note) to an investor.

How to Qualify a Buyer for Seller Financing

Just because the process is more flexible doesn’t mean sellers should skip proper due diligence. Real estate agents play a crucial role in helping sellers vet prospective buyers.

Key qualification factors:

• Creditworthiness: A credit report isn’t mandatory, but a helpful tool for assessing risk.
• Income Verification: Pay stubs, bank statements, and tax returns provide insight into the ability to pay.
• Employment Status: Steady employment or consistent self-employment history is a plus.
• Down Payment: A substantial down payment (preferably 20% or more with a minimum of at least 10%) demonstrates commitment.
• Debt-to-Income Ratio: This helps determine whether the buyer can afford the monthly home payments based on their income and other expenses.

It’s advisable to work with a note servicing company to handle payments, recordkeeping, taxes, insurance, and potential delinquency processes. This can be setup as part of closing with the buyer/borrower paying the reasonable monthly cost.

Risks and How to Mitigate Them

While seller financing offers flexibility and income opportunities, it has potential downsides.

Common risks:

• Buyer Default: Missed payments could result in costly legal action.
• Due-on-Sale Clause: If the seller has an existing mortgage, selling the property with financing could violate their loan terms.
• Title and Tax Complications: Proper documentation and servicing are essential to avoid legal trouble.

Mitigation tips:

• Work with a real estate attorney familiar with seller financing to draft airtight contracts.
• Use a promissory note secured by the property.
• Record a lien (deed of trust or mortgage) to protect the seller’s interest.
• Enlist a neutral third-party servicer to handle payment collection and disbursement.

Tips for Agents Handling Seller-Financed Deals

• Understand Local Laws: Real estate regulations vary widely by state, and not all forms of seller financing are allowed everywhere.
• Build a Trusted Network: Have an attorney, note servicer, and title company familiar with seller-financed deals.
• Market Smartly: Highlight seller financing as a unique selling point, especially in slower markets or areas with buyer financing challenges.
• Document Everything: Keep meticulous records, especially of all disclosures, signed agreements, and payment arrangements.

Finding Success with Seller Financing as a Real Estate Agent

Seller financing can be an excellent tool for unlocking deals. It opens up new opportunities for real estate agents and adds value to their services.

However, it’s not without risk or complexity.

By understanding the benefits, knowing how to qualify buyers, and addressing common concerns proactively, agents can confidently guide their clients through successful seller-financed transactions.