A Message for Sellers About “Carry-Back” Financing

Seller financing is a loan made by the Seller to the Buyer as a part of the Buyer’s purchase escrow. In simple terms, if you are a Seller who is “carrying” financing, this means that you have agreed to loan the Buyer a portion of the cash you would otherwise receive from the sale. The Buyer signs a Note as well as a Deed of Trust in your favor that will secure the loan by placing a lien on the property. After closing, the relationship between Seller and Buyer becomes one of Lender and Borrower. In your new role as Lender, you will collect payments from the Borrower, including interest on your money, until the loan is fully paid.

Seller “carry-back” financing can benefit both Seller and Buyer in a transaction. If you are a Seller who is willing to assist the Buyer with financing, this is a way to earn greater return (interest) on the equity in your property. If you are a Buyer who may be short of sufficient cash for a down payment, an opportunity to borrow money from the Seller may be attractive. Consult with your realtor to determine if this option is suitable for you.

What Happens in Escrow?

Your purchase contract and escrow instructions describe the specific terms of the financing, such as the amount of the note, the interest rate, the payment schedule, and the maturity date. Your Escrow Officer will prepare the Note and the Deed of Trust based on your instructions, and all parties will be given an opportunity to review and approve the documents before closing.

At close of escrow, the original, signed Deed of Trust is recorded in the County Recorder’s office and becomes a lien on the property. It will be mailed to the Seller within a few weeks of closing. The original, signed Note is handed to the Seller at closing. In addition, the Escrow Officer will instruct the title company to issue a title insurance policy which protects the Seller’s interest as “lender” by insuring the validity of the lien. The Seller should keep these three documents – the original note, the original deed of trust, and the title policy – in a safe place with other documents relating to the escrow transaction.

Managing the Payments

The Buyer will make payments to you based on the terms which are contained in the Note, typically once per month. You should maintain a record of the payments. For most loans, your Escrow Officer can provide an amortization schedule. This document lists the payment due dates from the loan start date until maturity. It will also calculate the amount of any “balloon payment” which may be required. Ask your Escrow Officer if this schedule can be furnished for your loan.

Another option is to hire a servicing agent to manage the payments. Some people prefer the convenience of having a professional service deal with the record keeping. In this case, the Buyer mails the payments directly to the agent. Always notify the Buyer in the event of any address change.

The Loan Payoff

The loan may be fully paid in one of two ways:

  • The Buyer may sell the property and make the loan payoff to you, the Lender, through escrow. In this case, you will be contacted by an Escrow Officer who will collect the necessary documents, obtain payoff figures, and manage the loan payoff. During this process, the lien will be cleared from the property as it is no longer needed as security for the loan.
  • The Buyer may pay the loan in full over time in accordance with the terms of the Note. When this happens, you must surrender the Note and Deed of Trust to the appropriate party for release of the lien. Some people choose to arrange for the services of an escrow company or title insurance company to handle this process, and this can usually be done for a nominal fee.