In a residential home purchase, sometimes a buyer is unable to obtain a bank loan for the full amount needed. In these cases, the buyer may ask the seller to act as a bank, lending money for a portion of the purchase price.
If another lender (a bank) is involved, that lender may limit how much the seller can loan. The seller’s mortgage lien will also be secondary to the bank’s mortgage lien. If no other lender is involved, the seller is essentially acting as the bank for the entire transaction. 
Seller financing often occurs in “For Sale By Owner” and “Rent-to-Own” situations, or if the buyer and seller are family members. In these situations, some degree of trust already exists between the parties or the seller is highly motivated to sell but cannot find a buyer who qualifies for conventional financing.
Regardless of how the parties came to structure the transaction, it is important that proper documents be used and that those documents be properly tailored to the specific situation.
For example, the parties will want an addendum to the sale contract indicating the basic terms of financing. They will also want proper mortgage documents to be prepared for signature at closing. In Missouri, those documents include a Promissory Note and a Deed of Trust.
A Promissory Note is a document that serves as evidence that a debt exists between the buyer and the seller for a certain amount of money and on certain terms.
A Deed of Trust, referred to as a “security instrument,” is a document that secures the property for the benefit of the Trustee (an agent of the lender). Deeds of Trust are recorded with the appropriate county Recorder of Deeds and create a lien against the property.
If you are a seller considering financing the sale your property, or a buyer seeking seller-financing, it is important to seek out proper legal advice prior to entering such a transaction. If you would like to discuss your situation with us, please call us at (314) 862.2237 or email us at mjacob@marcjacobesq.com
