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Real property

seller financing

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 Texas, seller financing is a legal alternative to traditional mortgage lending for real estate transactions. This method allows a buyer, who may not qualify for a traditional loan due to poor credit or insufficient credit history, to purchase property directly from the seller. The buyer signs a promissory note agreeing to pay the seller the purchase price plus interest over time, typically through monthly installments with a balloon payment at the end of the term. The terms of seller financing, such as interest rates and payment schedules, are negotiable between the buyer and seller. Texas law requires that seller-financed transactions comply with state regulations, including the Texas Property Code, which may involve recording the transaction with the county, providing proper disclosures, and ensuring the financing terms do not violate usury laws. Additionally, federal laws such as the Dodd-Frank Wall Street Reform and Consumer Protection Act impose certain requirements on seller financing to protect consumers. While seller financing can offer benefits like reduced closing costs and quicker closings, it also carries risks for both parties, including the potential for default by the buyer, which could lead to foreclosure or eviction proceedings initiated by the seller.

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