How Does Owner Financing Work When You Sell a House in Texas?

With owner financing in Texas, you, the seller, act as the bank. The buyer usually makes a down payment, gets the deed at closing through a title company, and signs a promissory note to you, secured by a deed of trust on the house. If they stop paying, you can foreclose. It can work well on a house you own free and clear, but federal and Texas lending rules still apply to you, and a house with a mortgage still on it adds real risk.

How the Deal Is Put Together

An owner-financed sale closes much like any other sale. There is a purchase contract, a title company, a closing and a recorded deed. The difference is where the buyer’s money comes from. In Texas the contract usually carries TREC’s Seller Financing Addendum, which spells out the down payment, the interest rate, the payment schedule and whether there is a balloon payment.

At closing the buyer signs two documents in your favor:

• A promissory note, which is the buyer’s promise to pay you on the agreed terms
• A deed of trust, which ties that promise to the house and lets you foreclose if the buyer defaults

If those two documents are new to you, our post on a deed of trust vs. a warranty deed in Texas explains how they fit together. Have a Texas real estate attorney draft them. A template from the internet is the most expensive thing you can save money on here.

The Rules That Apply to You

This surprises sellers more than it should. Once you lend money on a home, you are a lender in the eyes of the law, and three sets of rules can reach you:

1. Federal loan originator rules. Under Regulation Z (12 CFR 1026.36), a seller who finances one property in a 12-month period can be exempt if the loan meets certain conditions. A seller financing up to three can be exempt under stricter conditions, including a fully amortizing loan and a good-faith check that the buyer can repay.
2. Texas licensing rules. Texas has its own licensing law for residential mortgage loan originators, with its own exemptions. They do not line up exactly with the federal ones, so a seller can pass one test and miss the other.
3. Texas executory contract rules. If the buyer does not get the deed at closing, as with a contract for deed or rent-to-own deal longer than 180 days, Texas Property Code Chapter 5 applies. The seller has to record the contract within 30 days and send the buyer an annual accounting statement by January 31, among other requirements. Missing them can be treated as a deceptive trade practice.

Many sellers hand the loan terms to a licensed residential mortgage loan originator for a flat fee. That one step keeps most sellers on the right side of all three.

When Your House Still Has a Mortgage

This is the question Peter asks first. His background is in construction and lending, and the most common problem he sees with owner financing is a seller who still owes on the house. Most mortgages carry a due-on-sale clause. Your lender can demand the full balance once the house is sold, even if the buyer’s payments to you cover your payment.

A wraparound deal, where you keep paying your loan out of what the buyer pays you, does not make that clause go away. Before you agree to anything like it, talk to a real estate attorney and read your own note.

When It Makes Sense

Owner financing tends to fit a few situations:

• You own the house free and clear and would rather collect monthly income than a lump sum.
• The house is hard to finance the usual way, such as a property that needs work or does not fit a lender’s guidelines.
• You have a buyer with a real down payment and steady income who cannot get a bank loan yet.

It fits less well if you need all your cash at closing to buy your next home. Our post on what Houston sellers pay at closing is a good place to start that math, and our Seller’s Guide walks through the rest of the sale.

The Move Live Love TX Team™ works through owner-financed offers with sellers before they sign, so the terms, the paperwork and the people drafting it are lined up from the start.

Frequently Asked Questions

How does owner financing work in Texas?

The seller acts as the lender. The buyer usually pays a down payment, gets the deed at closing through a title company, and signs a promissory note to the seller, secured by a deed of trust on the house. If the buyer stops paying, the seller can foreclose.

Do I need a license to owner finance my house in Texas?

Maybe. Federal and Texas rules exempt some sellers, such as an owner financing one property in a year under set conditions, but the federal and Texas limits are not the same. Many sellers have a licensed residential mortgage loan originator handle the loan terms so they stay inside the rules.

Can I owner finance a house that still has a mortgage on it?

It is risky. Most mortgages have a due-on-sale clause that lets the lender demand the full balance when the house is sold. A wraparound deal, where you keep paying your loan from the buyer's payments, does not remove that risk, so talk to a real estate attorney first.

What is the difference between owner financing and a contract for deed in Texas?

With owner financing the buyer gets the deed at closing. With a contract for deed, the seller keeps the deed until the buyer pays off the contract. Texas regulates those executory contracts closely, with recording and annual statement requirements and penalties for sellers who miss them.