Seller financing
Seller financing means the seller extends credit to the buyer for part or all of the price, rather than the buyer bringing it from a lender.
The seller becomes the lender.
Why it happens#
The property will not finance conventionally. A house failing minimum property standards, a parcel with no comparable sales, land, or anything a lender declines.
The buyer cannot qualify. Credit, undocumented income, self-employment, recent bankruptcy.
Price and terms. A seller carrying financing can frequently obtain a better price, and receiving payments over time can be preferable to a lump sum.
Three structures, three very different outcomes on default#
This is the part that matters most in Minnesota, and it is where buyers are most often disadvantaged without understanding it.
A mortgage back to the seller. The buyer takes title and grants a mortgage. On default the seller must foreclose — publication, a sheriff's sale, and a redemption period of six months in most cases.
A contract for deed. The seller keeps legal title. On default the seller cancels under Minn. Stat. 559.21 — 60 days, or 90 where the seller is an investor seller. No redemption period afterwards. Every payment made is lost.
A wraparound, where the seller keeps an existing loan and creates a larger one around it. Triggers the due-on-sale clause and leaves the seller liable on the underlying mortgage.
Same economics, radically different consequences. A buyer offered seller financing should establish which structure is proposed before anything else, because the answer determines what happens on a bad year.
The seller's existing mortgage#
Where the seller still owes on the property, carrying financing generally triggers their due-on-sale clause, giving their lender the right to demand the full balance.
That is a live risk in any wraparound or subject-to arrangement, and it is a decision the lender is entitled to make at any time.
The clean case is a seller who owns free and clear. Everything else is built around a clause somebody could invoke.
For the seller#
Secure it properly. A recorded mortgage or a recorded contract for deed. An unsecured promise is not seller financing.
Verify the buyer. The seller is underwriting a loan, and the usual reasons a lender would decline are usually the reasons the buyer is here.
Use a servicer where payments run for years. A third party collecting, accounting and reporting removes the friction and creates the record that matters if things go wrong.
In Minnesota distressed property#
Where the seller is a homeowner in foreclosure, arrangements of this kind can fall within Minn. Stat. ch. 325N. Any homeowner approached should speak to a HUD-approved housing counsellor first — the advice is free and not attached to a transaction.