Seller financing
Seller financing is a sale in which the owner of the property extends credit for part of the purchase price in place of a bank, so the buyer pays that part to the seller over time instead of borrowing it from a lender.
The seller sits where the bank would, and the buyer signs to the seller
For the part of the price a seller finances, there is no loan officer across the table. The lender is the person selling the land, and the papers a bank would have the buyer sign are replaced by the buyer's written promise to pay the seller and, where the debt is secured, an instrument that ties that promise to the property.
As this glossary uses the term, the deed passes at closing, and that is the line between this and an installment arrangement in which the buyer pays over time and takes the deed later, which has its own entry under land contract. With seller financing the buyer owns the land from the day of closing and owes the seller for the unpaid part of the price.
Virginia supplies a form for the security. Under Va. Code 55.1-316, a deed of trust may be written so that the grantor grants the property to a trustee in trust to secure the debts it describes. In a seller-financed sale the buyer is the grantor, and the seller is the party the debt is owed to. What the trustee does, and what happens on payoff or default, is in the deed of trust entry.
The writing and recording rules behind those papers, and the installment-sale treatment that can follow when payments arrive in later tax years, are worked through in what seller financing on land is.
Credit on property the seller owns: a state exemption and federal conditions
Virginia licenses mortgage lenders and brokers under Chapter 16 of Title 6.2, and Va. Code 6.2-1602 lists who is exempt from the licensing and other provisions of that chapter. Item 12 is the seller-financing exemption: it reaches a person extending credit for part of the price of real property that person owns.
The federal side is separate and conditional. 12 CFR 1026.36 governs credit secured by a dwelling, and it takes a seller out of the definition of loan originator only when every listed condition is met, including limits on how many properties the seller finances in a 12-month period, a bar on the seller having built a residence on the property in the ordinary course of business, and conditions on the rate and repayment terms.
One reason the arrangement comes up on land is the loan market: Fannie Mae, for one, does not purchase or securitize mortgages on vacant land or land development properties. Financing a tract through a lender is taken up in whether you can buy land with a regular mortgage.
Weighing whether to carry a note on land you sell?
Send the county and what the buyer has proposed, and Lowell will talk through where the note, the deed of trust and your attorney fit before anything is signed. No cost, no obligation.
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Questions about this term
Is the Virginia licensing exemption for sellers limited to homes?
Its words are not. Item 12 of Va. Code 6.2-1602 speaks of real property the person owns, with no mention of a house. How the rest of that licensing chapter defines what it covers, and whether federal rules for dwelling-secured credit reach a particular note, are taken up with seller financing on land and, for a given sale, answered by an attorney.
Where this page's facts come from
Every rule, office and figure above traces to one of these. Rules change; check the office before you act on one.
- Va. Code 6.2-1602: exemptions from mortgage lender and broker licensing Code of Virginia
- Va. Code 6.2-1600: definitions, mortgage loan and residential property Code of Virginia
- Va. Code 55.1-316: form of deed of trust Code of Virginia
- 12 CFR 1026.36: credit secured by a dwelling, seller financer exclusions Electronic Code of Federal Regulations
- Topic No. 705, Installment sales Internal Revenue Service
- Selling Guide B2-3-01, General Property Eligibility Fannie Mae