What Is Seller Financing and How Does It Work in Tennessee?
You own your home outright, or close to it. A buyer wants it, has real money to put down, and the bank still won't say yes on your timeline. So you're asking what I hear from sellers in Franklin, Thompson's Station and Spring Hill: can I just be the bank? In Tennessee, you can. Here's how it works, and where it goes wrong.
I've invested in real estate for more than 20 years and I've been licensed since 2013. When a seller asks me about carrying the note, I start with what's owed on the home and what the buyer can put down.
What is seller financing?
Seller financing is a home sale where the seller acts as the lender. The buyer makes a down payment, takes title at closing, and pays the rest of the price to the seller in monthly payments with interest, instead of borrowing it from a bank.
You'll also hear it called owner financing or carrying the note. Same thing. The seller trades a lump sum at closing for a stream of payments, and the home itself secures the debt.
How do the note, deed of trust and purchase agreement fit together in Tennessee?
In a Tennessee seller-financed sale, three documents do three different jobs. The purchase agreement sets the deal. The promissory note is the buyer's promise to pay. The deed of trust ties that promise to the property, so the seller has a way to get paid if the buyer stops.
- The purchase agreement holds the price, the down payment, the closing date, and the financing terms the seller is offering.
- The promissory note is the loan itself: the amount, interest rate, monthly payment, term, balloon date, late fees, and what happens if a payment is missed.
- The deed of trust is how Tennessee commonly secures a home loan. It names a trustee who can sell the property if the buyer defaults, following the steps Tennessee law requires. It's recorded with the Register of Deeds in the county where the home sits.
At closing the buyer takes title and signs the note and the deed of trust, and the deed of trust gets recorded. From that day on, the seller is a lienholder, not an owner.
When does seller financing make sense?
Seller financing tends to fit when the seller doesn't need all the cash at closing and the buyer has a solid down payment but a bank problem that time or paperwork would fix.
The situations where I see it come up:
- The home is paid off, or the mortgage balance is small enough to pay off at closing.
- The seller would rather have monthly income than one lump sum.
- The buyer's income is real but hard to document the way a bank wants it.
- The buyer is waiting on another sale or rebuilding credit and needs a few years before a refinance.
- The property is hard to finance the usual way, like land, a home that needs work, or something one of a kind.
What are the risks for the seller?
The seller's biggest risk is a buyer who stops paying. After that come the due-on-sale clause on any existing mortgage, the work of servicing the note for years, and the tax treatment, which is a question for your CPA.
- Buyer default. If payments stop, the deed of trust lets you take the home back through foreclosure. That costs time and money. A real down payment is your best protection, because a buyer with money in the deal has a reason to keep paying.
- The due-on-sale clause. If you still owe on your own mortgage, most loans let the lender call the full balance due when the home changes hands. Selling on terms while your loan stays in place can trigger that clause. Pay it off at closing, or talk to a Tennessee real estate attorney before you go any further.
- Servicing the note. Somebody has to collect payments, track the balance, and confirm the taxes and insurance get paid. You can do it yourself or pay a loan servicing company to handle it.
- Taxes. How the gain and the interest get taxed is a CPA question. Ask before you sign, not after.
Federal lending rules can also apply when the buyer will live in the home. That's one more reason the paperwork belongs with a Tennessee real estate attorney.
What does the buyer need to know?
A seller-financed buyer still needs a real down payment, still pays interest, and often faces a balloon date, when the remaining balance comes due in one payment. The plan for that balloon date matters more than the interest rate.
- Down payment. Sellers ask for one because it protects them. For example, on a $400,000 price with $40,000 down, the seller carries a $360,000 note.
- Interest. The rate is negotiated between buyer and seller, not set by a bank.
- The balloon date. Many seller-financed notes are written so the monthly payment is figured over a long term, but the remaining balance comes due after a set number of years.
- What happens at the balloon. The buyer pays off the remaining balance, usually by refinancing with a bank or selling the home. If neither happens, the buyer is in default unless the seller agrees to extend. Plan the refinance from day one.
How do I structure and paper a seller-financed sale?
I start with two numbers: what's owed on the home and what the buyer can put down. If they work, I walk the seller through every term of the note before anything gets drafted, and I recommend a Tennessee real estate attorney draft the note and the deed of trust.
Here's the order I follow:
- Confirm the payoff on any existing loan and whether it gets paid off at closing.
- Agree on price, down payment, interest rate, monthly payment, and the balloon date.
- Settle the details people forget: late fees, who pays the taxes and insurance, whether the buyer can pay early, and what happens if the buyer sells.
- Write those terms into the purchase agreement.
- Have a Tennessee real estate attorney draft the note and the deed of trust.
- Close through a title company or attorney, so title gets checked and the deed of trust gets recorded.
- Set up servicing, whether that's the seller or a loan servicing company.
I've been part of more than 500 transactions. A deal like this is won or lost on paper, so nothing gets signed until every term is written down. If you want to see what the payments and interest look like first, run your numbers on my seller finance calculator.
What should you do next?
If you're thinking about carrying the note on your home, or you're a buyer and the seller is open to it, let's look at your real numbers together before anyone signs. Then talk to a Tennessee real estate attorney and a CPA. Text or call me at 615-392-1186.
Frequently asked questions
What is seller financing?
Seller financing is a home sale where the seller acts as the lender. The buyer makes a down payment, takes title at closing, and pays the rest of the price to the seller in monthly payments with interest, instead of borrowing it from a bank.
How does seller financing work in Tennessee?
In a Tennessee seller-financed sale, three documents do three different jobs. The purchase agreement sets the deal. The promissory note is the buyer's promise to pay. The deed of trust ties that promise to the property, so the seller has a way to get paid if the buyer stops.
What are the risks of seller financing for the seller?
The seller's biggest risk is a buyer who stops paying. After that come the due-on-sale clause on any existing mortgage, the work of servicing the note for years, and the tax treatment, which is a question for your CPA.
Can I offer seller financing if I still have a mortgage on the home?
If you still owe on your own mortgage, most loans let the lender call the full balance due when the home changes hands. Selling on terms while your loan stays in place can trigger that clause. Pay it off at closing, or talk to a Tennessee real estate attorney before you go any further.
What happens when the balloon payment comes due?
The buyer pays off the remaining balance, usually by refinancing with a bank or selling the home. If neither happens, the buyer is in default unless the seller agrees to extend. Plan the refinance from day one.
Who should draft the paperwork for a seller-financed sale?
I walk the seller through every term of the note before anything gets drafted, and I recommend a Tennessee real estate attorney draft the note and the deed of trust.