Seller financing — also called owner financing — is one of the most powerful and flexible tools in Texas real estate. When a bank says no, or when a seller wants to generate long-term income from a sale, seller financing creates a path forward. But it comes with significant legal requirements that both sides must understand before signing anything.
The short answer: Seller financing allows a property seller to act as the lender, extending credit directly to the buyer in exchange for a secured promissory note. When structured correctly, it benefits both parties. When structured incorrectly, it results in unenforceable contracts, regulatory violations, and costly litigation.
How Does Seller Financing In Texas Work?
In a typical Texas seller-financed transaction, the seller conveys the property to the buyer at closing using a warranty deed — transferring legal title immediately. The buyer simultaneously signs a promissory note agreeing to repay the purchase price at an agreed interest rate over an agreed term, and executes a deed of trust giving the seller a lien against the property under Texas Property Code Chapter 51. The seller essentially becomes the bank.
What Are the Different Types of Seller Financing in Texas?
| Type | How It Works | Risk Level |
|---|---|---|
| All-Inclusive / Purchase Money Mortgage | Seller finances the entire purchase price. | Moderate — requires careful structuring |
| Second / Junior Mortgage | Buyer gets a first mortgage from a lender; seller carries a second note for the remaining balance. | Higher — seller is subordinate to first lender |
| Wraparound Mortgage | Seller’s existing mortgage stays in place. New note “wraps around” the existing one. | High — due-on-sale clause risk; Texas Finance Code Ch. 159 compliance required |
| Lease-Option / Lease-Purchase | Buyer leases with option or obligation to purchase later. | Moderate — different legal framework applies |
What Are the Legal Requirements for Seller Financing in Texas?
- Texas Property Code Chapter 5 — disclosure and recording requirements, including balloon note disclosures under § 5.016
- Texas Finance Code Chapter 159 — governs wrap mortgage loans executed after January 1, 2022, including licensing requirements for certain sellers
- The federal Dodd-Frank Act — limits how many seller-financed transactions an individual can complete per year without triggering mortgage loan originator licensing. Most individuals are limited to one per year under the primary exemption, and three under the secondary exemption
- Texas Business and Commerce Code § 26.02 — all loan agreements must be in writing and signed by both parties to be enforceable
Benefits of Seller Financing for Texas Sellers
- Monthly income stream — principal and interest payments at rates typically above conventional mortgage rates
- Faster sale — eliminating bank approval accelerates closing significantly
- Broader buyer pool — buyers who cannot qualify for conventional financing become viable purchasers
- Potential installment sale tax benefit — may allow spreading capital gains recognition over the payment period (consult a tax advisor)
- Retained asset value — the promissory note can be sold to a note buyer if the seller needs liquidity
Risks and Protections for Texas Sellers
- Vet the buyer thoroughly — credit check, employment verification, assets, and references
- Require a meaningful down payment — typically at least 10%
- Have the property professionally appraised
- Ensure the promissory note and deed of trust are properly drafted, executed, and recorded
- Require proof of homeowner’s insurance with the seller named as additional insured
Frequently Asked Questions
How many seller-financed transactions can I do in Texas without a license?
Under the federal Dodd-Frank Act, most individual property owners can complete one seller-financed transaction per year without triggering mortgage loan originator licensing requirements. A secondary exemption allows up to three per year under certain conditions. Investors who regularly sell using seller financing may need to obtain MLO licensing or work through a licensed originator.
Can a buyer get title insurance on a seller-financed property?
Yes. Because the seller conveys title via warranty deed at closing, the buyer receives immediate legal title and can purchase a standard owner’s title insurance policy — a significant advantage over a contract for deed.
Let Us Structure Your Seller Financing Transaction
Guerra Days Law Group structures seller financing transactions — notes, deeds of trust, balloon disclosures, and Dodd-Frank compliance analysis — for buyers, sellers, and investors across Texas.
Call 281.760.4295 or contact us online.
