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.