What Owner Financing Actually Is
In an owner-financed sale, title transfers to the buyer at closing and the buyer signs a promissory note secured by a deed of trust in your favor. You collect a down payment up front and monthly principal and interest afterward. If the buyer stops paying, you foreclose under the deed of trust and take the property back.
The structure works cleanest when you own the property free and clear. If you still owe a mortgage, the deal usually becomes a wrap: the buyer's new note wraps around your existing loan, and you keep the spread. That's closely related to subject-to — see our side-by-side comparison for where the two diverge.
The Four Terms That Decide the Deal
**Down payment.** Texas owner-finance down payments typically run 5–20%. More down means less default risk and a buyer with real skin in the game.
**Interest rate.** You set it. Most seller-financed notes in South Texas price between 7% and 10% — above conventional, below hard money — because the buyer is paying for speed and flexibility.
**Amortization and balloon.** A common structure is a 30-year amortization with a 5-year balloon, so payments stay affordable while you get a defined cash-out date.
**Servicing.** Use a licensed third-party servicer. They collect, escrow taxes and insurance, issue 1098s, and create the payment record you'll need if the note is ever sold.
Texas Rules You Can't Skip
Owner financing to an owner-occupant buyer is a consumer mortgage transaction. Under the SAFE Act and Texas Finance Code, sellers who finance more than a limited number of properties per year generally need a Residential Mortgage Loan Originator to originate the note — most Texas sellers use a licensed RMLO for a few hundred dollars per deal.
Dodd-Frank ability-to-repay rules apply to owner-occupant notes as well: no negative amortization, and balloon structures need care. Contracts for deed are heavily restricted in Texas under Property Code Chapter 5 — use a deed plus deed of trust instead.
Close at a title company with a full title policy. Never hand over a deed without recorded security in your favor.
Who Buys Owner-Financed Houses
Self-employed buyers with strong income but two years of write-offs. Recent immigrants and ITIN buyers with real down payments. Investors who want to add a property without a new bank loan. See owner finance buyers for how to screen them properly.
If you'd rather not be the bank for years, the alternative is a buyer who takes over your existing mortgage — no new note, no servicing, no default underwriting on your end.
Tax Treatment: The Installment Method
Owner financing usually lets you report gain under the installment method (IRC §453), recognizing capital gain as principal comes in rather than all in the year of sale. Interest is reported as ordinary income. For a seller with a large gain, that spread can be the single biggest financial reason to carry a note.
Run the numbers with a Texas CPA before you set terms — the tax outcome should drive the down payment and balloon, not the other way around.