Seller Financing Addendum: What It Covers and What to Add
A seller financing addendum is an attachment to the purchase contract that sets the terms of the loan you, the seller, are giving the buyer: what credit documents the buyer must deliver, your right to reject the buyer's credit, the note's rate and payment schedule, and what the deed of trust will say. It does not replace the promissory note or the deed of trust. Those are separate documents signed at closing, and the addendum tells the drafter what to put in them.
This page walks through what a standard addendum covers, the state forms we could confirm, the federal lending rules for homes, and the terms and tax items sellers should raise with their attorney and CPA before signing. It is general information, not legal advice. Have a real estate attorney in your state review your documents.
What a seller financing addendum does
A purchase contract assumes the buyer brings cash or a bank loan. When you carry the financing, the contract needs to say:
- What the buyer must prove. Credit report, income, assets.
- What you can do if you do not like the buyer's credit. Usually terminate within a set number of days.
- The loan terms. Amount, rate, payments, maturity, prepayment, late fees.
- The security terms. What the deed of trust or mortgage will require: insurance, taxes, transfers, prior liens.
Without these in the contract, you are negotiating loan terms after you are already bound to sell.
The Texas form: TREC No. 26-8
Texas has a promulgated form. We confirmed the current version on the Texas Real Estate Commission site: Seller Financing Addendum, TREC No. 26-8, dated 11-07-2022. Its sections:
| Section | What it covers |
|---|---|
| A. Credit documentation | Buyer delivers credit report, employment and salary verification, deposit verification and/or a financial statement within a set number of days |
| B. Buyer's credit approval | If documents are late, seller may terminate and keep the earnest money; if seller finds the credit unacceptable, seller may terminate within 7 days and the earnest money is refunded |
| C. Promissory note | Amount and rate; prepayment in whole or part without penalty; a 5% late fee on installments more than 10 days late; matured unpaid amounts at 18% or the highest lawful rate, whichever is less; one of three payment schedules (single payment, monthly installments, or interest-only then installments) |
| D(1). Property transfers | Either consent not required (a later buyer must assume the note) or consent required (seller may call the note on a sale, a lease over 3 years, a lease with option, or a contract for deed) |
| D(2). Casualty insurance | Whether the buyer must insure with the seller as mortgagee loss payee |
| D(3). Tax and insurance escrow | Escrow not required (buyer shows proof each year) or required (buyer deposits a pro rata share with each installment) |
| D(4). Prior liens | Default on any senior lien is a default on the seller's deed of trust |
The form itself warns that seller financing "may be subject to laws regulating loans" and tells both sides to consult an attorney and a financial professional before signing. Note that the Texas form's default is prepayment without penalty. If you care when the buyer pays you off (it changes when your tax is due), negotiate that deliberately.
California: the seller financing disclosure
California does not have a single state-promulgated addendum, but it does have a disclosure statute. Under Cal. Civ. Code §2956, when a sale of a dwelling for not more than four families includes credit extended by the seller and there is an "arranger of credit" (typically a real estate licensee who helps negotiate the terms and is paid on the deal), a written disclosure must be made to both buyer and seller.
Under §2963, the disclosure includes, among other items:
- The note and security documents, and the property securing them.
- The terms of the note, or a copy.
- The terms of any senior liens: balances, payments, rates, balloons, maturity and whether they are in default.
- A warning that if the loan does not fully amortize, refinancing might be difficult or impossible in the conventional market.
- For a balloon, its date and amount, and a statement that there is no assurance new financing or an extension will be available.
- For an all-inclusive (wraparound) trust deed or real property sales contract, who collects payments and pays the senior lenders.
- Credit, employment and income information about the buyer, so the seller can judge the credit.
Other states have their own forms and rules, often published by the state real estate commission or the state Realtor association. Whether you are in Utah, North Carolina or anywhere else, get the current version from the official source rather than an old copy, and have it reviewed.
Federal rules: Dodd-Frank and seller financing
When the property is a dwelling and the buyer is a consumer, federal lending rules can apply to you as the lender. Here is what we confirmed in Regulation Z (12 CFR Part 1026).
The seller financer exemptions from the loan originator rules, §1026.36(a)(4) and (a)(5):
| One-property exemption | Three-property exemption | |
|---|---|---|
| Who can use it | Natural person, estate or trust | Any person |
| Volume limit | One property in any 12-month period | Three or fewer in any 12-month period |
| Built the home? | Must not have constructed it as a contractor | Same |
| Amortization | No negative amortization | Fully amortizing |
| Ability to repay | Not listed | Good-faith determination the buyer can repay |
| Rate | Fixed, or adjustable after 5+ years with reasonable annual and lifetime caps | Same |
A balloon note can fit the one-property exemption because it only prohibits negative amortization. It does not fit the three-property exemption, which requires full amortization.
The "creditor" threshold. Regulation Z treats a person as regularly extending consumer credit if it extended credit secured by a dwelling more than 5 times in the preceding calendar year, or more than one high-cost mortgage in 12 months (§1026.2(a)(17)(v)).
These rules are about homes. Seller financing land, commercial property or a business is generally outside them, though state usury and licensing laws still apply. See seller financing commercial real estate.
Terms to raise with your real estate attorney
A standard form covers the basics. These items are often left blank or at a default that may not suit you, so ask your attorney how each should be handled in your documents:
| Term | Why it matters to the seller |
|---|---|
| Interest rate at or above the AFR | A rate below the applicable federal rate turns part of your principal into interest (§§483, 1274). See seller financing interest rates and the AFR. |
| Down payment | Your cushion if the buyer walks away |
| Amortization and balloon date | Sets how your gain lands by year; a balloon can pull most of it into one year. See balloon payments. |
| Prepayment | An early payoff taxes the rest of your gain that year |
| Due-on-sale | Whether a later buyer can assume your note without your consent |
| Late fee and default rate | Must fit state law limits |
| Insurance and tax escrow | Protects the collateral |
| Personal liability | Whether you can pursue the buyer beyond the property, where state law allows |
| Servicing | Who collects, keeps records and issues year-end statements |
| Subordination | Whether you will ever let a later loan go ahead of yours (usually no) |
The note itself (installment vs straight note, recording, title insurance) is covered in seller financing contract and note terms.
Tax items to settle before you sign
The addendum fixes your tax pattern for years. Before signing, know:
- Your gross profit percentage. It decides how much of each principal payment is taxable gain.
- Year-one items that are taxed regardless of cash. Ordinary depreciation recapture under §453(i), and any mortgage the buyer's money pays off at closing.
- Whether the rate meets the AFR for the note's term.
- What an early payoff or a balloon does to your bracket in that year.
- Home sale exclusion. On a main home, the §121 exclusion comes out of gross profit first. See seller financing a home.
Model the whole schedule in the free calculator and read how seller financing works for the payment math.
If you still have a mortgage, check the due on sale clause before you sign.
Bottom line
The seller financing addendum is where your loan terms get locked into the purchase contract. Ask your agent or attorney whether your state has a current form, which federal and state lending rules apply to your property, and whether the form defaults fit the items that drive your risk and your tax: down payment, rate versus the AFR, balloon, prepayment and due-on-sale. Have a real estate attorney draft or review the addendum, note and deed of trust before you sign.
Questions to ask your CPA
- What is my gross profit percentage, and how much gain lands in each year under these terms?
- Is any of my gain recapture that is taxed in year one regardless of payments?
- What AFR applies to this note's term in the month we sign?
- If the buyer prepays in year 2, what is my tax that year?
- Does a balloon in year 5 push me into a higher bracket or the 3.8% NIIT?
- What records do you need from the servicer each year?
Run your own numbers. Compare a cash sale, seller financing and a structured installment sale side by side, free.
Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.