What Is a Seller-Financed Mortgage?

A seller-financed mortgage is an option to fund a property purchase.

A seller-financed mortgage is an option to fund a property purchase.

Conventional and government-backed mortgage loans together form the primary source of mortgages for buying single-family homes and small multi-family properties. These require that the buyer go through a full loan application and underwriting process for approval the borrower and the property. Sometimes problems inhibit the sale or purchase of a property. When this occurs, a seller-financed mortgage may provide the solution.

What Is a Mortgage?

A mortgage is an agreement that documents the pledge of a specific real estate asset as security for a loan or debt obligation. A mortgage is also the actual deed or contract pertaining to the mortgage agreement. When mortgage and bank lenders finance the property acquisition, the buyer typically signs a mortgage and a security lien on behalf of the lender. The mortgagor is the mortgage and lien holder; the mortgagee is the person required to repay the debt.

Seller-Financed Mortgage

A seller-financed mortgage is an agreement -- between a property's seller and buyer -- through which the seller becomes the mortgagor. Instead of using a bank, credit union or direct mortgage lender to fund the acquisition, the seller funds the transaction. The buyer then makes payments directly to the seller or his or her designee. A seller may provide 80 percent to 100 percent financing and serve as the first mortgage provider. Alternatively, a bank may provide the first mortgage with the seller providing 5 percent to 20 percent financing as a second mortgage.


A seller who owns a property outright will execute a new mortgage with the buyer. A seller who still owes money on an existing mortgage will use down payment proceeds to pay off the existing mortgage and enter into a new mortgage with the purchaser. Alternatively, a seller who has an existing mortgage on the property that will remain in effect after the closing can utilize a seller-financed wraparound mortgage. The buyer pays the seller, then the seller pays the pre-existing mortgage. For better protection, the buyer could make payments to a mutually agreed upon third party, most often a real estate attorney. The attorney pays the underlying mortgage holder and the seller from the monthly proceeds.


A seller-financed mortgage is an option when a property has issues that prevent it from meeting appraisal standards and thus qualifying for a conventional or government loan. It is used in a buyer's market to enhance the property's appeal or to enable buyers who cannot qualify for traditional financing to purchase the home. A seller may provide a second mortgage if the buyer possesses insufficient down payment funds to buy the property. For investment properties, sellers sometimes provide financing as a personal investment alternative to investing cash received from an outright sale.

Video of the Day

Brought to you by Sapling
Brought to you by Sapling

About the Author

Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.

Photo Credits

  • Jupiterimages/liquidlibrary/Getty Images