Pros and cons of seller financing for home sellers

Written by Samantha SheltonNMLS 1647301Updated October 2026

This article is general information about seller financing, not legal or tax advice. Consult a Michigan real estate attorney and a qualified tax professional before you agree to finance a buyer.

Seller financing makes you the lender: the buyer takes the home now, pays you monthly, and you hold either a promissory note secured by a recorded mortgage or a land contract. Federal law decides how often you can do it. Regulation Z excludes a seller financing three or fewer properties in any 12-month period from the mortgage loan-originator rules, and a narrower exclusion covers a natural person, estate, or trust financing only one property in any 12-month period.

The upside is real: you reach buyers no bank will touch and collect interest on top of the price. The cost is that you now carry one buyer’s credit risk on your largest asset, and getting the home back means foreclosure or forfeiture.

Learn how a seller-financed note differs from a land contract, what the federal limits say, what default costs you, and how the tax works. Start with our Selling a Home guide.

Key takeaways:

• Three properties is the federal line: Regulation Z’s exclusion for three or fewer properties in any 12-month period requires full amortization; the one-property exclusion permits a balloon.
• Michigan default runs on a 15-day clock: Forfeiture starts with a 15-day notice, and after a judgment for possession the writ waits 90 days if the buyer has paid under 50% of the price, or 6 months if 50% or more.
• Installment reporting spreads the gain, not all of it: Form 6252 recognizes gain as payments arrive, but depreciation recapture is taxed in full in the year of sale and the home-sale exclusion still caps at $250,000, or $500,000 jointly.

How does seller financing work when you’re the lender?

Two very different instruments hide under one label, and the difference is who owns the house tomorrow morning. With a note and mortgage, you deed the property to the buyer and record a mortgage against it, as a bank would. With a land contract, you keep legal title while the buyer takes equitable title and possession until it is paid. Don’t blend them; the remedies, recording, and tax timing all differ.

Either way, you are underwriting the buyer yourself. Skipping a lender’s income verification, credit pull, appraisal, and title review makes the sale fast, and leaves you holding the risk. If your buyer keeps getting declined, read buying a home with bad credit first, and see alternative financing options for home buyers. Nolo’s walkthrough of the legal mechanics of seller-financed sales is a useful primer before your first attorney meeting.

How many homes can you seller-finance before federal law calls you a loan originator?

Three in any 12-month period under one exclusion, one under the other, and the conditions differ.¹ Regulation Z’s rule at 12 CFR 1026.36 sets both, and falling outside an exclusion pulls you into the federal loan-originator regime.

• The three-property exclusion: Three or fewer properties in any 12-month period, open to entities as well as individuals, provided you own the property, did not build the residence in the ordinary course of business, the financing is fully amortizing, and you determine in good faith that the buyer can reasonably repay. Fully amortizing means no balloon.
• The one-property exclusion: Limited to a natural person, estate, or trust financing one property in any 12-month period. It requires no full amortization and no ability-to-repay finding, only a schedule that avoids negative amortization. This is where a balloon deal has to live.
• The rate condition is identical in both: Fixed, or adjustable no sooner than five years after consummation, subject to reasonable annual and lifetime caps and tied by a margin to a widely available index such as U.S. Treasury securities or SOFR.

A second threshold sits behind this. Regulation Z treats you as a “creditor,” opening the full ability-to-repay rule, only after you extend dwelling-secured consumer credit more than five times in the preceding calendar year. Few sellers approach that, yet almost every seller is inside 12 CFR 1026.36 the moment they finance one sale.

What are the pros and cons of seller financing?

The trade is liquidity for yield: cash at closing, exchanged for an income stream and its risk.

What are the strongest reasons to finance the sale yourself?

• You own the home free and clear: No mortgage of your own means no due-on-sale exposure and no payment to cover from the buyer’s money.
• You want the yield, not the lump sum: If the proceeds were headed for a savings account, a note secured by a home you know may pay far better.
• The property is hard to finance: Acreage or condition issues that fail a lender’s appraisal can make you the only lender available, which is leverage on price and terms.

What are the risks that actually bite?

• The balloon nobody can refinance: Most of these deals end in a lump sum the buyer must refinance away, and if they still can’t qualify, you are back where you started. See how balloon payments work.
• You become the servicer: Someone must collect payments, track principal and interest, confirm taxes and insurance, and issue year-end statements. A third-party servicer costs less than a botched payoff.
• Your cash is locked up: If you need the equity to buy next, this defeats the purpose. Model it on a seller’s net sheet against bridge financing.

What terms do seller-financed deals actually use?

Set the rate, the amortization, and the balloon date together, because federal law connects them. There is no reliable published average here, so build from the constraints, not from folklore.

Price the rate against something real. The IRS publishes applicable federal rates monthly, and Publication 537 sets the tier by term: short-term for three years or less, mid-term for more than three but not more than nine, long-term above nine. Charge less than adequate stated interest and part of your principal becomes taxable interest. Then check the Freddie Mac weekly average mortgage rate.

What happens if the buyer stops paying?

Your remedy is fixed by the instrument you chose at closing, and neither road is fast. A note and mortgage means foreclosure, measured in months plus legal fees and followed by a redemption period. A land contract lets you pursue forfeiture through summary proceedings, which moves faster, or foreclose in circuit court, which does not.

Sellers underestimate three things. You get the property back in the condition a defaulting buyer left it. Forfeiture and a money judgment are usually alternatives, so taking possession can extinguish the arrears claim. And default clusters at the balloon date, which makes the buyer’s path to a refinance the term worth most scrutiny. Protect yourself the way a lender does: a real down payment, income and credit verified in writing, and a security instrument recorded correctly. The pros and cons of accepting a contingent offer uses the same lens: rank offers by the odds they finish, then by price.

How is a seller-financed sale taxed?

An installment sale is one where you receive at least one payment after the tax year of the sale, and the method reports gain as each payment arrives rather than all in year one.² You file Form 6252; IRS Publication 537 governs. Each payment splits three ways: interest, taxed as ordinary income; return of basis, untaxed; and gain, at your gross profit percentage.

The mechanic is arithmetic. Sell for $300,000 with an adjusted basis of $180,000 and $20,000 of selling expenses.³ Gross profit is $100,000 against a $300,000 contract price, so the gross profit percentage is 33.33%, and 33.33% of every principal dollar you collect is gain.

• Recapture is not deferrable: Depreciation recapture is reported in full in the year of sale whether or not you received a payment, and only gain above it goes on the installment method. That matters if the home was ever a rental.
• The home-sale exclusion still applies: Section 121 excludes up to $250,000 of gain, or $500,000 jointly, if the home was your main home at least 24 months of the five years before the sale, and it is unavailable if you excluded gain on another home in the prior two years. See capital gains tax exemptions and IRS Publication 523 on gain from selling your home.
• You can elect out: Skip Form 6252 and report on Form 8949, Form 4797, or both, by the return’s due date including extensions.
• Watch the pledge and related-party rules: Above a $150,000 selling price, pledging the obligation to secure a debt can treat the net proceeds as a payment. Sell to a related person who resells within two years and you may be taxed on that sale.

What should you check before you agree to finance the sale?

Start with your own mortgage, because it can end the conversation. Under the federal Garn-St Germain Act, a lender may enforce a due-on-sale clause when the property transfers, and the exceptions for residential property with fewer than five dwelling units cover deaths, divorces, transfers to a spouse or child, short leases, and certain living trusts. None covers an arm’s-length sale, a land contract, or a wraparound. If you still owe, your lender can accelerate.

• Disclosure duties do not change: Financing the sale yourself, selling as-is, or skipping an agent does not let you conceal a known defect. See what a seller’s disclosure is.
• Market it normally, and ask who has done one: The terms are a selling point worth stating plainly, and our overview of real estate agent marketing covers how listings reach buyers, alongside selling your house. Seller financing is a specialty, and becoming a real estate agent explains what the license covers: your attorney drafts the note, not your agent.
• Model the net, not the price: Run the finances of selling and seller-paid closing costs, and if you’re buying next, get a mortgage preapproval.

Compare the alternatives first. Our Selling Strategies hub covers structures that don’t make you a lender, and working with a mortgage broker is the faster test: if a wholesale lender will take your buyer, financing them yourself buys risk you didn’t need.

What Michigan sellers should know

Michigan is a land contract state, and the statutes here are specific enough that generic advice gets sellers in trouble.

• The rate ceiling is 11%: A seller who is not a regulated lender or HUD-approved mortgagee may make a mortgage loan or land contract at a rate not exceeding 11% per year, inclusive of everything the Truth in Lending Act counts as a finance charge. Interest may not be added in advance and must be computed on unpaid balances.
• Forfeiture is fast, and it costs you the money claim: It works only if the contract expressly provides for it, and starts with a 15-day written notice. After a judgment for possession, the writ waits 90 days if the buyer has paid under 50% of the price, or 6 months if 50% or more. The trade is severe: that judgment bars the claim for money in arrears at trial, and once the writ issues it bars payments that would have come due afterward. You choose the house or the money.
• Foreclosure is the other road: Circuit courts may foreclose land contracts, but cannot order the land sold within 3 months of the complaint, and the buyer may redeem within 6 months after the sale.
• Record it, and know the tax timing: Michigan’s recording act voids an unrecorded conveyance against a later good-faith purchaser who records first, so the contract or a memorandum belongs at the register of deeds. A land contract under which legal title does not pass until the full consideration is paid is exempt from state and county transfer taxes at recording; the later deed is not. It is still a transfer of ownership for property taxes, so taxable value uncaps the year after execution, and the Seller Disclosure Act covers installment land contracts.

Have a Michigan real estate attorney draft the instrument and the notice forms; this procedure is unforgiving of templates.

FAQ: Seller financing for home sellers

Here are answers to common questions about seller financing.

How does seller financing actually work?

You and the buyer agree on price, down payment, rate, schedule, and term, then choose an instrument. With a note and mortgage, you deed the home to the buyer and record a mortgage as security. With a land contract, you keep legal title while the buyer takes equitable title and possession until it is paid. That instrument is how you recover the property. See alternative financing options for home buyers.

What interest rate should a seller charge?

High enough to clear the IRS floor and low enough to stay legal. Without adequate stated interest, the IRS recharacterizes part of your principal as interest using the applicable federal rate. Michigan caps an unregulated seller’s rate on a mortgage loan or land contract at 11% per year, inclusive of the finance charge. Benchmark inside that band against a real quote, a benefit of working with a mortgage broker.

What happens if the buyer defaults on seller financing?

It depends on your instrument. A recorded mortgage means foreclosure, measured in months plus legal fees and followed by a redemption period. A Michigan land contract offers forfeiture through summary proceedings, which is faster, or circuit court foreclosure, which is not. Most defaults surface at the balloon date, so a real down payment matters more than any clause.

Is seller financing a good idea for the seller?

It fits when you own the home free and clear, don’t need the proceeds for your next one, and will vet the buyer’s income and credit yourself. It’s a poor fit when you have a due-on-sale clause, need cash at closing, or couldn’t stomach a foreclosure. Run both scenarios on a seller’s net sheet, and have an attorney draft the documents either way.

The bottom line on seller financing

Seller financing turns your sale into a loan you own. Federal rules set its shape: three or fewer properties in any 12-month period keeps you inside one Regulation Z exclusion but requires full amortization and a good-faith ability-to-repay finding, while the one-property exclusion is the only one that tolerates a balloon. Michigan sets the rest: an 11% rate ceiling for unregulated sellers, a 15-day forfeiture notice, and a 90-day or 6-month wait for the writ depending on whether the buyer has paid half the price. Report the gain on Form 6252; recapture doesn’t wait.

If you’re deciding whether to finance a buyer or let a lender do it, talk to Align Lending first. We’ll shop your buyer’s scenario across our wholesale lender network, tell you plainly whether a mortgage is available, and get you approved on your own next purchase. Call 248-506-5727 or start online. Take the note, the contract, and any default question to a Michigan real estate attorney, and the tax reporting to a tax professional.

Footnotes:

1. This is general information, not legal advice. The seller-financer exclusions from the Regulation Z loan-originator definition, the conditions attached to each, and any applicable state licensing requirements are set by the Consumer Financial Protection Bureau and the State of Michigan and are subject to change. Whether a particular transaction falls inside an exclusion depends on facts specific to that sale. Consult a Michigan real estate attorney before structuring seller financing. Return to text.

2. This is general information, not tax advice. Eligibility for the installment method, your adjusted basis, deductible selling expenses, depreciation recapture, imputed interest, and the effect of the related-party and pledge rules depend on your individual circumstances. Consult a qualified tax professional about your situation. Return to text.

3. Example figures are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. The $300,000 selling price, $180,000 adjusted basis, $20,000 of selling expenses, and resulting 33.33% gross profit percentage are Align Lending calculations shown to demonstrate how the installment method allocates gain. They exclude interest income, recapture, and any exclusion you may qualify for. Your actual reporting depends on your records and your return preparer’s analysis. Return to text.

Sources: exclusion from the loan originator definition for a person providing seller financing for three or fewer properties in any 12-month period, including the requirements that the person own the property, not have constructed the residence in the ordinary course of business, that the financing be fully amortizing, that the person determine in good faith that the consumer has a reasonable ability to repay, and that the rate be fixed or adjustable after five or more years subject to reasonable annual and lifetime limitations and determined by adding a margin to a widely available index, 12 CFR 1026.36(a)(4); exclusion for a natural person, estate, or trust providing seller financing for only one property in any 12-month period, with a repayment schedule that does not result in negative amortization and the same rate conditions, 12 CFR 1026.36(a)(5). Definition of regularly extending consumer credit as more than 25 times, or more than 5 times for transactions secured by a dwelling, in the preceding calendar year, Regulation Z, 12 CFR 1026.2(a)(17)(v). Enforceability of due-on-sale clauses and the exceptions applicable to real property loans secured by residential real property containing less than five dwelling units, 12 U.S.C. 1701j-3. Installment sale defined as a sale where at least one payment is received after the tax year of the sale; reporting on Form 6252; the gross profit percentage; depreciation recapture income reported in full in the year of sale whether or not an installment payment was received that year; electing out by reporting on Form 8949 or Form 4797 by the due date including extensions; unstated interest and the federal short-term, mid-term, and long-term applicable federal rates for instruments of three years or less, more than three but not more than nine years, and more than nine years; the pledge rule for selling prices over $150,000; and the two-year related-party resale rule, Internal Revenue Service Publication 537, Installment Sales. Applicable federal rates published monthly as revenue rulings, Internal Revenue Service. Exclusion of up to $250,000 of gain, or $500,000 on a joint return, with the 24-month ownership and use test within the five years before the sale and the two-year frequency limitation, Internal Revenue Service Topic No. 701 and Publication 523. Michigan interest rate limit of 11% per year, inclusive of all amounts defined as the finance charge in section 106 of the Truth in Lending Act, on mortgage loans and land contracts made by lenders or vendors not approved as a mortgagee under the National Housing Act or regulated by the state or a federal agency, MCL 438.31c(6), and the same limit for purchase money mortgages, MCL 438.31c(7); prohibition on interest added or deducted in advance and requirement that interest be computed on unpaid balances, MCL 438.31c(9). Availability of summary proceedings after forfeiture of an executory contract only where the contract expressly provides for forfeiture, and exclusion of accelerated indebtedness from moneys required to be paid, MCL 600.5726. Fifteen-day written notice of forfeiture and its required contents, MCL 600.5728. Prohibition on issuing a writ of restitution until 90 days after judgment where less than 50% of the purchase price has been paid, or 6 months where 50% or more has been paid, MCL 600.5744(4). Merger and bar of claims for money payments due or in arrears at trial upon a judgment for possession after forfeiture, and of payments that would have become due after issuance of the writ, MCL 600.5750. Circuit court jurisdiction to foreclose land contracts, MCL 600.3101; prohibition on ordering a land contract sale within 3 months after the complaint is filed, MCL 600.3115; six-month redemption period for a land contract vendee after the sale, MCL 600.3140(2). Michigan recording act voiding an unrecorded conveyance against a subsequent good-faith purchaser for value who records first, MCL 565.29. State real estate transfer tax of $3.75 per $500 of value, MCL 207.525, with seller liability, MCL 207.523; county real estate transfer tax of 55 cents per $500 in a county with a population under 2,000,000, MCL 207.504, with seller liability, MCL 207.502; exemption for a land contract in which legal title does not pass to the grantee until the total consideration is paid, MCL 207.526(o) and MCL 207.505(m). Conveyance by land contract as a transfer of ownership, with taxable value adjusted for the calendar year following the year the contract is executed, MCL 211.27a(6)(b). Application of the Michigan Seller Disclosure Act to transfers of 1 to 4 residential dwelling units by installment land contract, MCL 565.952.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Federal loan-originator rules, Michigan land contract and forfeiture procedure, statutory interest limits, transfer tax rates, and installment-sale reporting change and vary by property, transaction, and locality; confirm current figures with your loan officer, confirm contract, disclosure, and default obligations with a Michigan real estate attorney, and confirm tax treatment with a qualified tax professional. Figures shown are illustrative, are not a rate quote or an offer of credit, and do not constitute an advertisement of credit terms. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.

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