Understanding the most common type of note in the secondary market.
Seller financing occurs when a property seller acts as the lender, allowing the buyer to make payments directly to them instead of obtaining a traditional mortgage from a bank or credit union. The seller creates a promissory note that outlines the loan amount, interest rate, payment schedule, and terms — essentially becoming the bank for that transaction. This arrangement is documented with the same legal instruments as a conventional mortgage: a promissory note and a deed of trust or mortgage lien recorded against the property.
Sellers choose to offer financing for several reasons. It can attract a wider pool of buyers, especially those who don't qualify for conventional mortgages due to self-employment income, credit challenges, or non-traditional financial situations. Seller financing often enables a higher sale price because the seller is providing a valuable service — access to credit — on top of the property itself. It also creates a passive income stream through monthly payments with interest, which many sellers find attractive for retirement planning or wealth building.
While the legal structure is similar, seller-financed notes have characteristics that distinguish them in the secondary market. They typically carry higher interest rates — often 2 to 4 percentage points above conventional rates — because the seller is taking on more risk by lending to a borrower who may not qualify for traditional financing. This higher rate actually works in the seller's favor when it comes time to sell the note, as note buyers value the higher yield.
Down payments on seller-financed deals vary widely. The industry standard recommendation is at least 10 to 20 percent down, which gives the borrower meaningful equity and reduces the risk of default. Notes with larger down payments are significantly more valuable in the secondary market because the loan-to-value ratio is lower, providing a cushion if the property value declines. A note with 30% equity behind it will sell for considerably more than one with only 5% equity.
Terms are another distinguishing factor. Bank mortgages are typically 15 or 30 years with fixed rates. Seller-financed notes often have shorter terms — 5, 10, or 15 years — sometimes with balloon payments requiring the borrower to refinance at a certain point. Notes with balloon provisions can be attractive to buyers who want a defined exit timeline, but they also carry refinancing risk if the borrower can't qualify for a conventional loan when the balloon comes due.
If you're considering seller financing with the intention of eventually selling the note, structuring the deal properly from the start can add thousands of dollars to your eventual sale price. The key factors that note buyers evaluate include the borrower's credit score, the down payment amount, the interest rate, the payment history, the property type and condition, and the documentation quality.
Start with a proper credit check on your buyer — even though you're not a bank, knowing their credit profile helps you set appropriate terms and gives future note buyers confidence in the borrower's ability to pay. Require a meaningful down payment of at least 15 to 20 percent. Set the interest rate at or above current market rates for similar loans. Use a licensed escrow company or attorney to prepare the documents and record the lien properly.
Perhaps most importantly, use a loan servicing company to collect payments from day one. Professional servicing creates a clean, verifiable payment history that note buyers trust. Self-collected payments documented with personal records are harder to verify and can reduce your note's value. The cost of professional servicing — typically $25 to $35 per month — is a tiny investment compared to the value it adds when you sell.
Most sellers don't intend to hold their notes for the full term. Life circumstances change — you might need capital for a new investment, want to eliminate the risk and hassle of being a lender, need funds for medical expenses or education, or simply prefer a lump sum over monthly payments. Whatever your reason, the cash-for-notes market provides a straightforward exit.
The ideal time to sell is after establishing 12 to 24 months of clean payment history. This seasoning period demonstrates that the borrower is willing and able to make payments reliably, which significantly increases buyer confidence and your note's value. A note with 24 months of on-time payments will typically sell for 5 to 10 percentage points more than an identical unseasoned note.
You don't have to sell the entire note. Partial note sales allow you to sell a specific number of payments — say the next 60 months — while retaining ownership of the remaining payments. This can be an effective strategy if you need immediate capital but don't want to give up the entire income stream. The discount on partial sales is usually smaller than on full sales because the buyer's risk is limited to a shorter period.
Ready to find out what your seller-financed note is worth? Get a free quote from our team — we'll evaluate your note and provide a transparent offer within 48 hours.