Financing a for-sale-by-owner home: mortgages and owner financing basics
Most FSBO buyers use a regular mortgage, just as they would with an agent. Some deals use owner financing, where the seller lends part of the price. Here is how both work and where the risks are.
Key points
- A buyer with a mortgage pre-approval is the simplest and safest buyer for an FSBO seller.
- In owner financing, the buyer signs a promissory note to the seller, usually secured by a recorded mortgage or deed of trust.
- Federal mortgage rules and state laws can apply to sellers who finance a sale. Get legal advice before you agree to terms.
- Payments received over time can make the sale an installment sale for tax purposes.
Regular mortgages on FSBO homes
A lender does not care whether a home has a listing agent. The buyer applies, the lender orders an appraisal, and the deal closes through a title company, escrow agent or attorney. Buyers should compare Loan Estimates from several lenders (CFPB). Sellers should ask for a recent pre-approval letter before they accept an offer, and check that the contract's financing contingency has clear dates.
First-time buyers can get free or low-cost help from a HUD-approved housing counselor. The CFPB's Buying a house guide explains each stage of the loan.
What owner financing is
With owner financing, also called seller financing, the seller acts as the lender for some or all of the price. The buyer usually pays a down payment, then makes monthly payments to the seller. The key documents are:
- A promissory note: the buyer's written promise to repay, with the interest rate, payment amount, schedule and term.
- A mortgage or deed of trust: it secures the note against the home and is recorded in public records.
- Clear terms for late payments, taxes, insurance, any balloon payment and what happens on default.
Other arrangements you may hear about
- Land contract or contract for deed: the seller keeps legal title until the buyer finishes paying.
- Lease with an option to buy ("rent to own"): the buyer rents first and may buy later on agreed terms.
- Loan assumption: the buyer takes over the seller's existing loan, only if the lender allows it.
State laws on these arrangements differ widely, and buyers can have fewer protections in some of them. Treat each one as a legal agreement, not a handshake deal.
The federal rules
Federal mortgage rules under Regulation Z cover people who arrange or make home loans. The rule includes limited exclusions for people who finance the sale of their own property, with conditions on how many properties they finance and on the loan's terms. A seller who falls outside those exclusions can be treated as a loan originator, with extra duties. Read the rule at 12 CFR 1026.36, and ask a real estate attorney how it and your state's lending laws apply to you.
If the seller still has a mortgage
Many mortgages say the full balance becomes due when the home is sold or transferred. Before any deal that leaves the seller's loan in place, the seller should read the loan documents and speak to the lender and an attorney.
Risks for each side
| Seller's risks | Buyer's risks |
|---|---|
| The buyer stops paying, and recovering the home follows your state's foreclosure or contract rules | Hidden liens or title problems if no title search is done |
| Your money stays tied up in the home for years | A large balloon payment that must be refinanced |
| Taxes and insurance go unpaid by the buyer | Fewer protections under some land contract arrangements |
How both sides can protect themselves
- Use a title company for a title search, title insurance and the closing.
- Have an attorney draft or review the note, the security document and the contract.
- Record the documents in the county records.
- Sellers: with the buyer's written permission, check credit and income, and ask for a meaningful down payment.
- Consider a licensed loan servicing company to collect payments and keep records.
Taxes on owner financing
If you receive at least one payment after the tax year of the sale, the IRS calls it an installment sale. You report it on Form 6252 in the year of the sale (IRS Topic 705). IRS Publication 537 explains the details, including how interest you receive is treated. A tax professional can help with your numbers.
We do not offer loans, refer borrowers or earn money from lenders.
Sources
- CFPB: Buying a house
- CFPB: Loan Estimate explainer
- CFPB: Find a HUD-approved housing counselor
- eCFR: 12 CFR 1026.36 (Regulation Z), loan originator rules incl. seller financing
- IRS: Topic no. 705, Installment sales
- IRS: Publication 537, Installment Sales
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