In owner financing, the seller holds the note. The buyer signs it and makes the payments, and the seller keeps the signed original as proof of the debt until it is paid off, or until the seller sells or transfers it to someone else.
Who has what after closing
An owner-financed closing produces a deed, a note and a security instrument, three of the documents defined in the note basics guide, and each ends up somewhere different.
| Item | What it is | Who ends up with it |
|---|---|---|
| The deed | Proof of who owns the property | The buyer, in a standard sale |
| The note | The buyer’s signed promise to pay | The seller |
| The mortgage or deed of trust | The document that makes the property security for the note | Recorded with the county, with the seller named as the secured party |
The buyer owns the house and the seller owns the debt, which is the position a bank would be in. In mortgage language the seller is the mortgagee. A land contract works differently: the seller keeps the deed as well until the contract is paid, and the contract itself does the job of the note.
The original is the thing you hold
“Holding” is meant literally here. The original note, with the buyer’s signature in ink, is the instrument that proves the debt, and the right to collect travels with it.
The mortgage or deed of trust is easier to replace, because a copy sits in the public county records and can be retrieved. The note is generally not recorded, so if the original is lost there may be no other original anywhere. Keep it in a bank safe deposit box, in a fireproof safe, or with the attorney or servicing company handling the loan, and keep a photocopy somewhere else for reference. If yours has gone missing, read what to do when you have lost the original note.
What holding it lets you do
As the holder you receive each payment as the note sets out. You may charge a late fee if the note provides for one, enforce the debt through the process your state requires if the buyer defaults, and sell or assign the note to someone else.
Your rights stop at what the buyer signed. The payment and the rate stay as written unless both of you agree in writing to change them. The buyer has possession of the property, and getting it back after a default means going through the legal process, with an attorney’s help.
How the note moves to someone else
The seller is the first holder, and the note can pass to others from there:
- Sale. The seller sells the note to an investor for a lump sum. The seller endorses the note over to the new holder and signs an assignment of the mortgage or deed of trust, which is recorded.
- Inheritance. The seller dies and the note passes to heirs or to the estate.
- Transfer to a trust or company. The seller moves the note into a living trust or an LLC.
- Partial sale. The seller sells a set number of payments. The buyer of those payments holds the note while collecting them, and it is assigned back afterwards.
Through all of these the buyer of the property keeps the same loan on the same terms, and what happens to your payer after you sell comes down to a new address for the payment. If a sale or a partial sale is the move you are weighing, send us the note details and we will tell you what the note would bring and whether a partial suits it.
Where a servicer fits
A seller can hire a loan servicing company to collect payments and keep the ledger. Storing the original documents can be part of what a note servicing company does as well. It acts for you throughout, so the note and the money remain yours. If it stores the original, ask for a written receipt listing each document held.
Check what you actually have
Find the original note, then confirm you also have the recorded mortgage or deed of trust and a record of the payments received. Together they are most of what anyone needs to value the note, and a gap in any of them is better found now than in the middle of a sale. If the person named on the note is no longer the one holding it, because of a death, a trust or an earlier sale, look as well for the endorsement or assignment that shows how it passed from one to the other.
Related questions
Does the buyer get a copy of the note?
Yes, the buyer should keep a copy of everything they signed. The signed original stays with the seller or with whoever the seller has asked to store it.
Who holds the deed in owner financing?
In a standard owner-financed sale the buyer receives the deed at closing and the seller holds a lien. Under a land contract the seller keeps legal title until the contract is paid off.
What happens to the note when it is paid off?
The holder marks the original note as paid and returns it to the payer, and signs a release of the mortgage or deed of trust. The release is recorded so the public record shows the lien is gone.