Seller Financing in Texas: What Homebuyers and Sellers Need to Know

In today’s real estate market, with mortgage rates lingering above 6% and some properties sitting unsold for months, seller financing (also known as owner financing) is drawing renewed interest. This alternative financing method offers unique opportunities for both buyers and sellers, especially in Texas where the practice is well-established but comes with specific legal considerations.

If you’re considering seller financing—whether as a buyer looking for flexibility or as a seller eager to move a property—understanding how it works, the pros and cons, and how it can even pair with a first mortgage from a mortgage broker like LendFriend is essential. Buyers looking for these opportunities can often spot based on how long they've been sitting on Zillow. The higher the days on market the more open the seller may be to seller financing offers.

In areas like Austin and Houston, where inventory keeps rising month after month and the average days on market keeps going up, its a city ripe for buyers to negotiate the deal they want, whether that's closing cost credits, a temporary rate buydown, a lower purchase price or seller financing.

What Is Seller Financing?

Seller financing is a type of real estate transaction where the seller acts as the lender, allowing the buyer to make payments directly to them instead of securing a traditional mortgage through a bank or mortgage broker. Rather than receiving the full purchase price at closing, the seller agrees to extend credit to the buyer for a period of time (for usually around 3-10 years after the sale occurs). The credit comes in the form of a promissory note that outlines the loan terms—such as interest rate, payment schedule, and default provisions. A deed of trust or mortgage is usually recorded in public records to protect the seller’s interest. This means the property serves as collateral, just like with a conventional loan, but instead of working with a professional lender, you're working with the seller.

This type of financing primarily appeals to buyers looking to secure a better deal and avoid paying high interest on an entire conventional loan. While it can help those with challenged credit or limited credit history, its main draw is for buyers seeking to lock in lower rates on part of the financing while combining seller financing with traditional loans to reduce their overall borrowing costs.

Risks and Drawbacks of Seller Financing

For buyers, seller financing presents some challenges:

• The biggest risk is the balloon payment at the end of the short loan term—buyers must plan carefully to refinance or pay off the loan to avoid default.
• There’s also the possibility that sellers, especially those uneducated in how seller financing works, may demand higher-than-market interest rates, particularly if the buyer has poor or limited credit history.
• Because seller financing attracts buyers who might not qualify for conventional loans, sellers face credit risk and may require larger down payments or stricter terms to offset that risk.
• Additionally, without a professional lender involved, buyers need to ensure the agreement is properly drafted and recorded and contains all the items to protect their rights.

For sellers, the primary risk is buyer default, which may force the seller to initiate foreclosure proceedings—an expensive and time-consuming process. The seller also ties up their equity in the property rather than receiving the full purchase price upfront, which could limit their ability to reinvest or use those funds elsewhere. Lastly, Texas imposes specific legal requirements on seller-financed transactions, and failing to comply can lead to serious consequences.

Seller Financing as a Second Mortgage with LendFriend

One of the most practical uses of seller financing is combining it with a first mortgage from a mortgage broker like LendFriend. In this scenario, the first mortgage provides 50% to 75% of the financing, while the seller finances the remaining portion. The seller financing functions as a second mortgage or junior lien on the property. In some cases (depending on how desperate the seller is), sellers may offer financing at rates as low as 3% - though the lower the rate, the shorter the loan period typically is—often just a few years with a balloon payment at the end. It’s important to note that no seller is likely to provide financing beyond the amount of equity they have, since they will need to pay off their own mortgage at closing. This setup benefits both parties: the buyer can complete the purchase with less cash down while securing favorable terms on the first mortgage, and the seller helps close the financing gap without needing to finance the entire sale price.

The senior lien (first mortgage) gets priority in case of foreclosure, and both loans are recorded against the property to protect the parties’ interests. This structure allows buyers to leverage more affordable primary financing while taking advantage of seller flexibility for the remaining portion. When a conventional or FHA loan is used as the first mortgage, the combined first and second mortgage can go as high as 95% of the property’s value, giving buyers significant purchasing power while keeping their cash investment relatively low. It also gives sellers a way to facilitate the sale without taking on the entire lending risk or extending more credit than they can afford. Buyers should work closely with their lender and legal counsel to ensure the structure aligns properly and meets all compliance requirements.

For example, consider a $600,000 home purchase. In this case, the seller is providing a $120,000  loan structured as interest-only, meaning the buyer pays only the interest during the term, with the principal due as a balloon payment at maturity. The structure might look like this:

The structure might look like this:

• First mortgage from LendFriend (70%): $420,000 at 6.5% interest.
• Seller financing as a second mortgage (20%): $120,000 at 4% interest over five years with a balloon payment.
• Buyer down payment (10%): $60,000.

Monthly principal and interest payments:

• First mortgage (LendFriend): About $2,655/month.
• Second mortgage (Seller): About $640/month.

If the buyer instead took a conventional loan for the full $600,000 at 6.5%, their payment would be about $3,792/month. By combining seller financing, the buyer saves approximately $497/month—or nearly $30,000 over five years—before refinancing or paying off the seller portion. The seller earns interest income while helping the buyer bridge the financing gap.

How to Approach Seller Financing Safely

For both buyers and sellers in Texas, approaching seller financing safely requires careful planning and professional guidance. Sellers should work with a knowledgeable real estate attorney to ensure the loan documents comply with Texas law, including proper disclosures and adherence to SAFE Act requirements. Recording all documents properly, including the deed of trust and promissory note, protects the seller’s security interest and ensures transparency. Sellers should vet buyers carefully by reviewing their financial qualifications and understanding their ability to make payments and refinance when needed.

Buyers should engage their own legal counsel to review contract terms and ensure the agreement is fair and enforceable. They should have a clear exit strategy, particularly when a balloon payment is involved. Additionally, buyers should conduct thorough due diligence on the property—including inspections, title searches, and appraisal reviews—just as they would in any conventional transaction. This preparation helps both sides reduce risk and build a successful transaction.

Final Thoughts: Is Seller Financing Right for You?

Seller financing can be a powerful tool for both buyers and sellers—particularly in today’s higher-rate environment. Whether you’re a buyer seeking creative options or a seller looking to attract serious offers, seller financing deserves a close look. And if the seller isn’t offering 100% financing, remember: you can pair seller financing with a first mortgage from LendFriend, gaining the benefits of both worlds.

Let’s talk about your goals and structure the right financing solution. Call us at 512.881.5099 or connect with us online.