Most real property (real estate) transactions for the sale and purchase of property involve a buyer who secures financing (a mortgage loan) from a bank for the purchase of the property and transfers the lump sum purchase price to the seller at the closing, in exchange for the seller transferring the deed (title) to the buyer—or to an escrow for safekeeping until the buyer repays the loan to the lender.

But if the buyer does not have good credit or a sufficient credit history—and especially if the seller wants to sell the property to a specific person—the seller may consider seller financing for the transaction. In a seller-financed transaction the buyer signs a promissory note promising to pay the purchase price of the property to the seller over time, plus a stated interest rate, which is included in a monthly installment payment projected over some number of months or years.

Seller financing is often structured for the buyer to make monthly payments for a number of years (five years, for example) and then make a balloon payment for the remaining balance of the loan. This seller financing structure anticipates the buyer being able to secure a traditional loan from a bank with improved creditworthiness and some equity in the property (a home, for example).

There are pros and cons to seller financing for both the buyer and the seller. Seller financing may reduce closing costs and shorten the time to closing, but the buyer may pay a higher interest rate and the seller will take on risk that the buyer will default on the payments and the seller will have to go through the legal process of evicting the buyer from the property.

In Kentucky, seller financing, also known as owner financing, is a legal alternative to traditional mortgage lending for real estate transactions. This method allows the seller to act as the lender, providing the buyer with a loan to purchase the property. The buyer signs a promissory note agreeing to pay the seller the purchase price plus interest over a specified period. The terms, including the interest rate and the length of the loan, are negotiated between the buyer and seller. A common structure includes monthly payments with a balloon payment at the end of a term, such as five years, at which point the buyer may refinance with a traditional lender. Seller financing can offer advantages such as lower closing costs and quicker closing times, but it also carries risks for the seller, such as the potential for buyer default. In the event of default, the seller may have to initiate foreclosure proceedings to reclaim the property. Kentucky state statutes and federal laws, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, provide certain regulations for seller financing, which may include restrictions and obligations on both parties to ensure the transaction is conducted fairly and legally.