A seller-financed note comes into being at the closing of a property sale. The buyer signs a promissory note for the unpaid part of the price, signs a security instrument that pledges the property, and the security instrument is recorded in the county land records.
How carefully each of those things is done decides how good the note is. Years later a note buyer will read the same papers and ask what a careful seller asks on the first day. The steps below are set out in the order a closing office would take them, and the learning center is the place to look up any term in them that is new to you.
From handshake to first payment
- Agree the terms. Price, down payment, interest rate, length of the loan, monthly payment, and whether there is a balloon, which is a large final payment due before the loan would pay itself off.
- Check the buyer. A credit report, proof of income and the source of the down payment.
- Check the title. A title company searches the public record to confirm who owns the property and what liens, meaning claims against it, already exist.
- Have the documents drawn. The promissory note and the security instrument, prepared by an attorney or a closing office that knows your state.
- Close. The deed passes to the buyer, the buyer signs the note and the security instrument, and the down payment changes hands.
- Record. The deed and the security instrument are filed with the county.
- Set up collection. Decide who receives the payments and who keeps the records.
A land contract, also called a contract for deed, parts from this list at the closing step. The seller keeps the deed until the price is paid, and a single agreement does the work of both documents. Everything else on the list still applies.
Setting the terms
Each term agreed at this stage becomes a line on a note buyer’s pricing sheet later. A larger down payment gives the borrower more equity, which is the part of the property’s value that belongs to them and is not owed to you. A rate close to what lenders are charging at the time holds its value better than a low one, and a shorter loan returns your money sooner. A balloon shortens the wait too, though it depends on the borrower being able to refinance or pay when it falls due.
Set the terms to suit the sale in front of you, knowing that they cannot be changed once signed without the borrower’s agreement and that they travel with the note to anyone who buys it.
Checking the buyer
A bank would not lend without looking at the borrower, and a seller acting as the bank has the same reason to look. Ask for a written application, pull credit with the buyer’s permission, review their income, and keep copies of all of it. Where the buyer will live in the home, the federal and state rules on seller financing may require some of this checking anyway.
What goes into the promissory note
The note is the debt itself. A well-drawn one leaves no gaps in the following:
- the names of the borrower and the note holder
- the amount borrowed and the interest rate
- the payment amount, the due date each month and the dates of the first and last payments
- any balloon and when it is due
- the late charge and the grace period, meaning the days allowed before a payment counts as late
- whether the borrower may pay early without a charge
- what counts as default and what the note holder may do about it
The borrower signs one original. Keep it somewhere safe, because the signed original is what a buyer will expect to receive if you ever sell.
What goes into the security instrument
The security instrument connects the debt to the property, and depending on the state it is a mortgage or a deed of trust. It carries the legal description of the property and the borrower’s duties beyond the payment: keeping the property insured with you named on the policy, paying the property taxes and maintaining the building. If it includes a due-on-sale clause, the borrower also agrees to pay you off before selling or transferring the property.
The same document sets out how you may take the property back after a default. State law governs that process, which is one more reason to have the document drawn locally.
Closing and recording
A title company or an attorney’s office charges for a closing, and the fee buys several things. The closer collects the signatures, handles the funds, issues title insurance if you buy it, and sends the documents to the county. Recording the mortgage or deed of trust is what gives public notice of your lien and fixes its place in line ahead of later claims, so a security instrument that was never recorded can leave you behind someone who filed after you.
Once the county has recorded the security instrument it sends the document back. File it with the original note, the closing statement, the title policy and the buyer’s application, and you have the start of your note file.
Collecting the payments
You can collect the payments yourself or hire a note servicing company, also called a loan servicer, which receives them, tracks principal and interest, holds money for taxes and insurance if you set that up, and sends year-end statements. Whichever you choose, aim to finish each year with a record an outsider would accept: dates, amounts and proof that the money arrived. A servicer’s ledger provides that without further effort from you. A holder who collects in person can get close to it by depositing each payment separately and keeping the bank statements.
A well-made note beside a weak one
| Well made | Weak |
|---|---|
| Documents drawn for the state by an attorney or closing office | A form found online, filled in by hand |
| Security instrument recorded at closing | Never recorded, or recorded years later |
| Title searched and insured | No title work |
| Buyer’s credit and income on file | Nothing known about the buyer |
| Real down payment, shown on the closing statement | Little or nothing down |
| Payments traceable through a servicer or a bank | Cash, with no receipts |
A note from the right-hand column may still find a buyer. It is priced lower, because the quality of the paperwork is part of a note’s value and the buyer is being asked to pay for uncertainty. If you cannot tell which column an existing note belongs in, send us the note details and we will tell you how a buyer would read it.
If your note already exists
The closing is behind you, so the work now is to gather what it produced:
- the original signed note
- the recorded mortgage, deed of trust or land contract
- the closing statement and the title policy, if one was issued
- a record of every payment received
Make a list of anything missing, since a buyer will ask about it. The county can supply a copy of a recorded document and the closing office may still have its file, so those gaps can be filled. The signed original note has no second copy, which makes it the first thing to look for.
Related questions
Who prepares the documents for a seller-financed sale?
An attorney or a closing office that works in the property's state. Each state has its own requirements for notes, mortgages, deeds of trust and land contracts, so a form from another state or a generic template can cause problems later.
Is the promissory note recorded with the county?
Generally the security instrument is recorded and the note is not. The original note stays with the note holder. Practice can vary, so confirm with your closing agent.
What if my security instrument was never recorded?
Ask a title company or attorney whether it can still be recorded and what that would mean for your place in line. An unrecorded lien is a real weakness, and a note buyer will ask about it.