In a seller-financed transaction, the seller agrees to act as the lender, allowing the buyer to purchase the property without a traditional mortgage. Instead of applying through a bank or credit union, the buyer signs a promissory note that outlines the loan amount, interest rate, monthly payment, amortization schedule, due date for any balloon payment, and consequences for default. To secure the loan, a deed of trust is recorded in the county where the property is located, giving the seller the right to foreclose if the buyer fails to meet their obligations.
In Texas, all licensed real estate agents and brokers are legally required to use promulgated forms approved by the Texas Real Estate Commission (TREC) when facilitating a seller-financed transaction. This includes the Seller Financing Addendum (TREC No. 26-8); see below, which outlines the buyer’s credit documentation requirements, the loan’s repayment structure, insurance provisions, tax escrows, and transfer restrictions. While members of the public may create their own seller-financing contracts without using the TREC form, doing so without legal assistance introduces significant risk. Private parties drafting their own terms should strongly consider hiring a Texas real estate attorney to ensure that the contract is enforceable and compliant with federal and state lending regulations. Meanwhile, licensed real estate agents are equipped to guide clients through the TREC-approved process using the official addendum.
Owner-financing agreements are fully negotiable, but there are common market norms. The interest rate is typically 2–5% higher than conventional mortgage rates, reflecting the added risk taken on by the seller. A typical structure may include a 20–25% down payment, 30-year amortization, and a 5-year balloon, meaning the remaining balance becomes due in a lump sum after five years unless refinanced or paid off. These terms—especially the balloon feature—should be carefully reviewed, as they can significantly impact a buyer’s long-term ability to retain the property.
To protect both parties, many seller-financed transactions in Texas are structured with the involvement of a third-party escrow or loan servicing company. These companies collect the buyer’s monthly payments, disburse taxes and insurance premiums if escrowed, and track payment history. The Seller Financing Addendum includes a checkbox indicating whether a third-party servicer will be used and specifies who—buyer or seller—will be responsible for paying the monthly servicing fee, which typically ranges from $25 to $100. These details must be clearly negotiated and written into the agreement to avoid future confusion or disputes.
Finally, it’s important to note that Texas applies federal guidelines from the SAFE Act, which limits how many seller-financed transactions a person can conduct annually without a license. Generally, individuals may carry out up to five seller-financed sales per year without needing to register as a Residential Mortgage Loan Originator (RMLO). Real estate investors or professionals exceeding that limit must obtain licensing through the Texas Department of Savings and Mortgage Lending.
Whether you’re a buyer or seller, seller financing can offer more flexibility than traditional lending—but it also demands a higher level of diligence, disclosure, and documentation. Working with a licensed Texas real estate agent and a qualified attorney ensures your transaction is both legal and secure.
Frequently Asked Questions (FAQ)
What is seller financing in Texas and how does it work?
Seller financing—also called owner financing—allows the seller to extend credit directly to the buyer, bypassing the need for a traditional bank loan. The buyer signs a promissory note agreeing to repay the loan, and a deed of trust is recorded to secure the debt with the property. In Texas, licensed real estate agents must use the TREC Seller Financing Addendum (No. 26-8) to formalize the terms. This document covers interest rate, repayment structure, credit documentation, insurance requirements, and default provisions. Buyers typically make monthly payments directly to the seller or through a loan servicing company. The process offers more flexibility, but also more legal complexity, so professional guidance is strongly advised.
Is the TREC Seller Financing Addendum required, and who can use it?
Yes—for any transaction involving a Texas real estate license holder, use of the TREC Seller Financing Addendum is mandatory. The form ensures that seller-financed transactions meet basic legal and financial standards, including documentation of the buyer’s creditworthiness and repayment terms. Members of the public who are not working with an agent may create their own contracts, but this is strongly discouraged without legal counsel. Private parties are not prohibited from writing their own agreements, but without proper legal protections and disclosures, these contracts may be vulnerable to enforcement challenges. Licensed agents can only assist with the TREC-promulgated version, not with custom legal documents.
What are typical interest rates and terms in a seller-financed agreement?
Terms in seller financing are fully negotiable, but generally less favorable to the buyer than traditional mortgages. The interest rate is usually 2–5% higher than prevailing market rates. Common structures include 20–25% down payment, 30-year amortization, and a 5-year balloon, meaning the remaining balance is due in a lump sum at year five. These terms are often used to reduce the seller’s risk while allowing the buyer to refinance later with a conventional lender. It's important for buyers to plan for the balloon payment and understand all penalties and interest provisions listed in the promissory note.
Can I use a third-party servicing company for payments, and who pays the fee?
Yes. Many seller-financed deals in Texas use a third-party loan servicing company to collect monthly payments, disburse escrow funds, and track balances. This adds a layer of professionalism and helps avoid disputes over payment history. The TREC Addendum allows the buyer and seller to agree on whether servicing is required and who will pay the servicing fee. These fees typically range from $25 to $100 per month, and the responsibility for payment—buyer, seller, or split—must be clearly spelled out in the contract.
Do I need a license to offer seller financing in Texas?
Not always. Texas follows the federal SAFE Act, which limits unlicensed seller financing to five or fewer transactions per year. If you sell more than five properties annually using seller financing, you must obtain a Residential Mortgage Loan Originator (RMLO) license. There are also exemptions for certain sellers, such as individuals financing their homestead or selling to a family member. However, anyone providing seller financing as part of a business model should review their licensing obligations with the Texas Department of Savings and Mortgage Lending or consult with a qualified attorney.
