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 Tennessee, seller financing is a legal alternative to traditional mortgage loans for real estate transactions. This arrangement involves the seller acting as the lender, with the buyer making payments directly to the seller under the terms of a promissory note. The note outlines the purchase price, interest rate, payment schedule, and may include a balloon payment provision. Seller financing can offer benefits such as lower closing costs and quicker closings, but also carries risks like higher interest rates for buyers and the potential for seller loss if the buyer defaults. Tennessee law requires that such transactions comply with state real estate regulations, including proper recording of the deed and the mortgage or deed of trust that secures the promissory note. Sellers must also be aware of federal regulations, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, which may impose additional obligations on seller-financed transactions, particularly if the seller is not a licensed mortgage originator and the buyer will use the property as their primary residence.