2. Mortgage clauses, including payment timing, payment structuring, personal liability, and prepayment options can be negotiated to suit the buyer’s requirements.

The major terms and considerations of typical seller financing are:

Length of Mortgage. Since the seller generally does not want to wait 25 or 30 years for the money and the buyer wants to avoid the high monthly payments associated with a short-term loan, a balloon mortgage is used. The monthly payments are based on a 25-year amortization schedule, but the entire loan matures (balloons) in a relatively short period of time. This time period ranges from a few months up to ten years.

Loan-To-Value Ratio. The seller generally wants a large cash down payment so that the loan is more secure, while the buyer wants to make a small down payment to retain as much cash as possible. A minimum of 10% down is frequently agreed upon.

Loan Prepayment. The buyer must be able to have the right to prepay the loan without penalty when new financing can be arranged. The seller may want this same condition to get the money back sooner. However, the seller may not have a better use for the money and therefore prefers that the loan not be paid off early unless there is a prepayment penalty.

Interest Rate. This is a good bargaining point. If the rate is below the rate on available loans, expect to get a good price for the property.

Right to Assign. With this right, if the initial borrower sells the property during the term of the loan, the new buyer may assume the existing note without the lender’s consent.

Tax Considerations. Periodic payments result in interest deductions for the borrower each year but taxable income for the note holder.

Non-recourse. If arranged, this limits the buyer’s loss to the amount of equity; no personal liability on the loan.

Frequently, a lot or vacant land purchased for development involves seller financing. With this arrangement, the seller accepts a small (10 to 20%) cash down payment and the buyer’s note (secured by a first mortgage on the property) for the unpaid balance of the price. The loan is usually paid off by a construction loan.