How to Write a Promissory Note for Seller Financing

The promissory note is the heart of a seller-financed deal. It is the buyer's written, signed promise to repay the money the seller is lending. This guide explains, in general terms, the provisions a real estate promissory note commonly includes and how it fits with the other closing documents. It is not a template and not legal advice: notes secured by real estate are governed by state law and, for owner-occupied homes, by federal lending rules, so have an attorney draft or review yours.

Note vs. mortgage or deed of trust

Two documents work together. The promissory note creates the debt: who owes whom, how much, and on what terms. The security instrument, a mortgage or a deed of trust depending on the state, pledges the property as collateral, so the lender can foreclose if the note is not paid. A note without a recorded security instrument is an unsecured IOU, so the seller would have no direct claim on the property. Both should be signed at closing, and the security instrument should be recorded with the county.

Provisions a note commonly includes

1. Parties and date

The full legal names of the borrower(s) (the buyer) and the lender/holder (the seller), the date, and often the property address the note relates to.

2. Principal amount

The amount borrowed, usually the purchase price minus the down payment, written in both words and figures.

3. Interest rate and how it is calculated

The annual rate, whether it is fixed or adjustable, and the method, typically interest calculated monthly on the unpaid principal balance. Make sure the rate complies with your state's usury laws. In the U.S., also ask a tax advisor about IRS minimum interest (imputed interest) rules for seller-financed sales.

4. Payment terms

The monthly payment amount, the first payment date, the due day each month, where and how payments are made (directly, to a servicer, or by electronic transfer), and how payments are applied, typically first to fees, then interest, then principal. Attaching an amortization schedule as an exhibit helps both parties, but the note's terms control.

5. Maturity date and balloon

When the loan must be fully repaid. If payments are calculated on a long schedule but the loan is due sooner, the note should clearly state the balloon date and that the entire unpaid balance and accrued interest are due then. Our balloon payment calculator shows the amount.

6. Prepayment

Whether the borrower can pay early, in full or in part, and whether there is any prepayment penalty. Many seller notes allow prepayment without penalty, which makes refinancing easier.

7. Late charges and grace period

How many days after the due date a payment is considered late, and the late fee. Many states cap late fees on home loans, so check local rules.

8. Default and acceleration

What counts as default (missed payments, failing to keep insurance or pay taxes, transferring the property without consent) and the lender's remedies. The key remedy is acceleration: the right to declare the entire balance due immediately after a default, usually after written notice and a chance to cure.

9. Due-on-sale

Sellers often include a clause requiring payoff if the buyer sells or transfers the property, so the seller is not left financing a stranger. This is the same kind of clause banks use. See our due-on-sale guide.

10. Security reference

A statement that the note is secured by a mortgage or deed of trust on the described property, recorded on a given date.

11. Taxes, insurance and escrow

Often addressed in the security instrument: the buyer's duty to keep property taxes current and maintain hazard insurance naming the seller, and whether monthly escrow is collected.

12. Other common clauses

Waivers of presentment and notice of dishonor (technical rights under negotiable-instrument law).
Attorney's fees and collection costs if the lender must enforce the note.
Governing law: which state's law applies.
Joint and several liability if there are several borrowers.
Notices: addresses for formal notices.
Signatures of the borrower(s), and notarization where required. The note is usually signed only by the borrower.

Getting the numbers right

Errors in the payment amount are surprisingly common. Calculate the payment from the principal, rate and amortization period with the standard formula. Our seller financing calculator does this and shows any balloon. Then double-check the first few lines of the schedule: in month one, interest should equal the principal times the annual rate divided by 12. If the note uses a different interest convention (for example 365/360), say so explicitly, because it changes the numbers.

Regulatory points to raise with your attorney

Whether federal rules on residential mortgage loan originators apply, and whether you qualify for a seller-financing exemption. Exemptions can restrict balloons, adjustable rates and require a good-faith determination of the buyer's ability to repay.
State licensing, disclosure and foreclosure requirements.
Whether a loan servicer should be used, and who issues year-end interest statements.
Tax reporting of interest received and of the sale itself. See our seller income calculator for the economics, and a tax pro for the tax treatment.

Mistakes to avoid

Using a generic online form that does not match your state's law or the security instrument.
Leaving out the maturity or balloon date, or writing it ambiguously.
Not recording the mortgage or deed of trust.
Payment figures that do not match the rate and term.
No insurance requirement, or insurance that does not name the seller.
No written procedure for notice and cure before acceleration.

A clear, properly drafted note protects both sides: the buyer knows exactly what they owe and when, and the seller has an enforceable claim backed by the property.

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Disclaimer: This guide is general educational information, not legal, tax or financial advice. Laws on seller financing, lending and real estate transfers vary by state and country and change over time. Consult a licensed real estate attorney and a tax professional before entering into any agreement.