Seller financing is a lawful way to sell property in the United States, and it is regulated. Federal consumer lending rules, state lending and licensing laws, and the terms of any existing loan on the property can all apply. Which of them reach your deal depends mostly on who the buyer is and how often you sell this way.
Read this page as a map. It names the areas of law, says what each is trying to do, and points to the person who can answer for your state and your facts. It is general information and cannot stand in for legal advice on your deal. Limits, deadlines and section numbers are left out, because they change and differ by state.
The question that decides most of it
Start by asking whether the buyer will live in the property as their home. Consumer protection law is aimed at people borrowing against the place they live, so the sale of a house to an owner-occupant draws the most rules, while vacant land, a rental sold to an investor, a commercial building or a business draws fewer. Treat that as a pattern only, because some states regulate land sales and contracts for deed closely whoever the buyer is.
Then count how many seller-financed sales you make. Rules written for lenders may carve out the person who sells their own property now and then, and treat someone who does it repeatedly more like a lender.
The layers at a glance
| Layer | What it is concerned with | Who to ask |
|---|---|---|
| Federal consumer lending rules | Whether the borrower can afford the loan, which loan features are allowed, and who may arrange a home loan | Real estate attorney |
| State licensing | Whether making or arranging the loan needs a license | Attorney, state financial regulator |
| State interest limits | The highest rate and charges a private lender may set | Attorney |
| State rules on the instrument | What a mortgage, deed of trust or land contract must contain, and how default is handled | Attorney, title company |
| The existing loan, if any | Whether the seller’s own lender can demand payment when the property is sold | Attorney, the lender’s loan documents |
| Tax | How the gain and the interest are reported | CPA |
Federal rules on home loans
Congress tightened the rules on residential lending after the 2008 financial crisis. The main law is commonly called the Dodd-Frank Act, with a related law on licensing mortgage loan originators known as the SAFE Act. Both are aimed at the mortgage business, yet their wording can reach an individual who finances the sale of a home.
In general terms these rules deal with whether the lender made a reasonable effort to confirm the borrower can repay, whether the loan carries features regulators consider risky, such as certain balloons or a balance that grows over time, and whether the person who set up the loan was allowed to do so. There are exceptions for sellers who finance only a small number of properties in a year, and the exceptions come with conditions of their own. Ask an attorney whether you fit one before closing, while the terms can still be changed.
State licensing
Each state decides who may make or arrange loans inside its borders. One may treat a person who finances the sale of their own home as outside the licensing rules, another may set a count of deals above which a license is needed, and a third may look at whether someone was paid to put the loan together. The same patchwork applies after the note is made, which is why anyone brokering notes has to check licensing state by state as well.
Limits on interest
Usury laws are state laws that cap the interest a lender may charge. The cap, what counts toward it, and which loans are exempt all vary, and a lender who charges more than the law allows can face penalties. If you plan to set a rate well above what banks charge, have an attorney confirm it is allowed for your type of loan in your state.
Rules about the instrument itself
Every state has its own law on mortgages, deeds of trust and land contracts. That law governs what the document must say, how it is signed and recorded, what notice a borrower must receive after missing payments, and whether the lender takes the property back by foreclosure or by forfeiture. Land contracts get particular attention in some states, in the form of required disclosures, recording duties or extra protections for a buyer who has paid for years.
When the seller still owes a bank
If your own mortgage is still in place, look in it for a due-on-sale clause, which lets the lender call the whole loan due when the property is sold or transferred without its consent. A seller who finances a sale on top of that mortgage, as happens in a wraparound, is exposed to the clause. Whether to act on it is the lender’s choice, and the exposure remains for as long as the old loan does.
Tax, in outline
A seller who is paid over several years may be able to report the gain as the payments arrive instead of all in the year of sale, which is generally called an installment sale. The interest you receive is reported separately from the gain. Tax rules also expect a loan to carry a reasonable rate of interest, and may treat part of each payment as interest even when the note says otherwise. How any of this applies turns on your own situation, so take it to a CPA. Selling the note later is a separate event, and the tax on a note sale is a question for the same CPA.
Why the rules matter when you sell the note
A note buyer steps into your position. If the loan was made in a way that gives the borrower a legal defense, that defense can follow the note to its new owner, so buyers check. On a note secured by someone’s home they may ask who drew the documents, whether the borrower’s ability to repay was looked at, and whether a licensed originator was involved. A note that answers those questions cleanly keeps more buyers in the bidding. One that cannot answer them may still sell, to fewer buyers and at a lower price. They are among the first things we ask when you send us a note to price, so it helps to have the answers ready.
Before closing, and after
If you have not closed yet, pay an attorney in the property’s state to draw the documents and to say which of these layers applies to you. A problem found at that stage can be fixed by changing a term, which stops being possible once the papers are signed. Reading the other seller-financing guides in the learning center first will make that meeting shorter.
If the note already exists, the rules it was made under are fixed, and what remains is how a buyer will read it. Write down who prepared the documents, whether the borrower lives in the property, and what checking was done on them at the time. Where you do not know, the attorney or closing office that handled the sale is the place to ask, and their file may hold the borrower’s application.
Related questions
Do seller financing rules apply to vacant land?
Consumer lending rules are aimed mainly at loans on a home the buyer will live in, so a land sale may draw fewer of them. Some states regulate land sales and contracts for deed closely all the same. Ask an attorney in the state where the land sits.
Can I be penalized for charging too much interest on a private note?
State usury laws cap interest on some loans, and the penalties for going over fall on the lender. The caps and the exemptions differ by state and by type of loan. Have an attorney confirm your rate before closing.
Will a note buyer check whether my note followed the rules?
Expect it on a note secured by someone's home. A buyer takes on any defense the borrower may have, so they look at how the loan was made. A note with clean answers keeps more buyers interested.