Is 20 percent down a rule for seller financing or just an agent's preference?

Question

Say a seller owns a rental free and clear and would rather have a monthly check than a pile of cash to redeploy. A buyer's agent tells the seller to ask for 20 percent down minimum. Where does that number come from? Twenty percent is not a bank rule that applies to a seller carrying paper. It is a common convention, not a requirement. A buyer offering 10 percent and proposing a higher rate to compensate is a reasonable structure, not a red flag by itself, provided the note terms and the property's equity cushion support it. On the recourse point, it is true that in most owner financing structures the seller can take the property back if the buyer stops paying, through foreclosure or, in some structures, a faster forfeiture process depending on the state and how the transaction is documented. That does make the down payment somewhat less about pure loss protection and more about buyer commitment and equity cushion. A larger down payment still matters because it lowers the loan to value, reduces the odds of default in the first place, and covers the seller's costs if the property does need to be taken back and resold.

dmitri_248 · Answer

20% isn't a rule that applies here. Bank underwriting standards are the bank's internal policy plus whatever the secondary market will buy, and a private noteholder isn't selling to Fannie Mae. The number could be 5% or 40%. What the down payment actually buys is the buyer's reluctance to walk. Someone with $12k in a house behaves differently from someone with $60k in it. A higher rate in exchange for less down means getting paid more per month for a buyer who's cheaper to abandon. That trade might be fine, it just isn't free.

bmoreno23 · Answer

The "I get the house back" part is the bit I'd chase down. Everything I've read says it depends on whether you're holding a mortgage or deed of trust versus a land contract, and how long the process takes varies a lot by state. Some states are months of judicial foreclosure with attorney fees the whole way.

mitchell_ray4 · Answer

And you get the house back in whatever condition someone who stopped paying leaves it in. Nobody replaces a water heater in the year they're deciding to default.

ryanmck27 · Answer

The higher-rate-for-less-down thing has a ceiling you should know about. States cap interest rates on private loans and the caps differ, some are high enough that nobody hits them and a few are not, so whatever rate you land on needs a check against your state's usury limit before it goes on paper. There are also federal rules about how a rate on seller-carried residential paper can be set on certain deals. Not something to eyeball.

jordan_ellis2 · Answer

Ask the 10% buyer what the down payment is made of. Savings, gift from a relative, proceeds from something he's selling. A buyer who's scraping the last of his cash together to hit 10% has no cushion left for the first bad month, and you're the one who finds out about it.

Rena Guide · Answer

There's no legal minimum down payment on a seller-carried note. Twenty percent is a habit borrowed from bank lending, where it's the line above which a lender stops requiring mortgage insurance. You're not a bank and there's no insurer, so the number is whatever you and the buyer agree to.

What the down payment does is set how much of the loss lands on you if things go wrong. Say the house is worth $200k. At 20% down you're owed $160k against a $200k asset, so there's $40k of room for repairs, unpaid taxes and the cost of getting the property back before you're underwater. At 10% down that cushion is $20k, and legal fees plus a few months of deferred maintenance can eat that. The higher interest rate the buyer offered pays you more per month, and it doesn't put any equity between you and a bad outcome.

On getting the house back: your remedy depends on the instrument you use and on your state's law. A mortgage or deed of trust normally means foreclosure, which in some states is a trustee sale in a couple of months and in others is a court case that runs much longer with attorney fees the whole way. A land contract is a different animal with its own state-specific rules. Which one you're signing is worth asking your attorney directly, because it decides what a default actually costs you in time.

One more thing sellers don't expect. The buyer starts paying property taxes and insurance, and if he lets either lapse you find out late, sometimes from a tax delinquency notice. Requiring proof of insurance naming you as mortgagee and asking a servicer to escrow the taxes fixes it for a small monthly fee.

Is 20 percent down a rule for seller financing or just an agent's preference?

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