To sell a house on contract, you take the bank’s place: the buyer moves in and pays you directly over time, while the deed stays in your name until the balance is paid off. The mechanics come down to seven things done in order — confirming your mortgage allows it, vetting the buyer, making required disclosures, drafting a contract for deed, signing and recording it, managing the payment period, and reporting the sale correctly to the IRS.
Confirm Your Mortgage Allows It
If your property still carries a mortgage, this step decides whether the rest of the plan is even possible. Almost every residential mortgage contains a due-on-sale clause, which lets your lender demand the full remaining balance the moment you transfer any interest in the property. A land contract counts as that kind of transfer.1Office of the Law Revision Counsel. 12 US Code 1701j-3 – Preemption of Due-on-Sale Prohibitions
Federal law lists a handful of transfers a lender can’t call the loan over: transfers to a spouse, transfers into a living trust where you remain a beneficiary, and transfers resulting from death. Selling on contract to an unrelated buyer is not on that list.1Office of the Law Revision Counsel. 12 US Code 1701j-3 – Preemption of Due-on-Sale Prohibitions
If your lender finds out and calls the loan, you have to pay the balance in full or face foreclosure on a home somebody else is living in. Some sellers proceed anyway and hope the lender never notices as long as payments arrive on time. That is a gamble with real consequences. The safest path is to sell on contract only if the property is free and clear, or to get written consent from your lender before you sign anything.
Vet the Buyer and Pull the Documents
Start with a title search. You need to confirm there are no undisclosed liens, judgments, or easements clouding the title, and that the deed reflects your authority to sell. This protects both sides from surprises that could unravel the deal years later.
Then evaluate the buyer the way a bank would. Pull a credit report to see payment history and outstanding debts. Ask for income verification — W-2s for employees, tax returns for the self-employed. These records tell you whether the buyer can realistically carry monthly payments for the life of the contract. Skipping this is where contract sales tend to go wrong. A buyer who defaults after two years leaves you with a home that has been off the market that entire time, plus the cost of regaining possession.
Pull the property’s legal description off your current deed. That is the precise boundary description using metes-and-bounds or lot-and-block references, and it must be copied into the contract exactly as written. A street address will not hold up if the contract is ever challenged.
Make the Required Disclosures
Seller financing does not exempt you from federal disclosure rules. If the home was built before 1978, you must give the buyer the EPA’s lead-paint pamphlet, disclose any known lead-based paint hazards, hand over any existing inspection reports, and give the buyer at least ten days to conduct their own lead inspection before signing. The contract itself has to include a lead warning statement signed by the buyer, and you must keep the signed disclosures for three years after the sale.2US EPA. Real Estate Disclosures about Potential Lead Hazards
Most states layer their own disclosures on top: known structural defects, flood zone status, pest damage, and similar items. The specifics vary, but the duty to disclose known material defects applies in nearly every state. Failing to disclose can expose you to a lawsuit long after the ink is dry.
Draft the Contract for Deed
The contract for deed (called a land contract in some states) is where the financial terms lock in. You can get a form from a real estate attorney or a legal document service, but it must comply with your state’s requirements. A generic template pulled off the internet may be missing language your state mandates. Even if you draft the document yourself, having an attorney review the final version is worth the cost.
Price, Down Payment, and Interest
The purchase price reflects the agreed value of the home. Down payments typically fall between 10% and 20%, giving the buyer immediate equity and giving you a financial cushion if they default early. A larger down payment means a buyer with more skin in the game, which usually means a lower risk of default.
The interest rate is negotiable, and sellers commonly set it above prevailing mortgage rates to compensate for the added risk of private financing. One constraint matters: the IRS requires the contract rate to meet or exceed the Applicable Federal Rate for the loan’s term. If it falls short, the IRS treats part of each payment as imputed interest regardless of what your contract says, which changes the tax picture for both sides. As of early 2026, the long-term AFR sits around 4.72% with annual compounding and the short-term rate is roughly 3.59%.3Internal Revenue Service. Rev Rul 2026-6 – Applicable Federal Rates These rates change monthly, so check the current figure before finalizing.
Payment Schedule and Balloon
Payments run on a defined schedule, usually monthly. If the contract does not fully amortize over its term, it will include a balloon payment requiring the buyer to pay the entire remaining balance in one lump sum on a set date. Balloon terms commonly run from five to ten years.4Consumer Financial Protection Bureau. What Is a Balloon Payment? When Is One Allowed? Spell out exact due dates, the grace period, and any late fees.
Balloon payments are where deals often collapse. The buyer may plan to refinance with a bank before the balloon comes due, but if their credit has not improved or home values have dropped, they cannot get approved. Go in expecting a balloon default is a realistic scenario, not an edge case.
Default and Forfeiture
Define exactly what happens if the buyer stops paying. In many states a contract for deed lets the seller pursue forfeiture, a process where the buyer loses the property and all payments made to date after a specified cure period. Cure periods typically run from 30 to 90 days depending on the state. During that window the buyer can bring the account current and keep the property.
Courts in a growing number of states, though, treat land contracts more like mortgages once the buyer has built substantial equity. In those situations, a seller may be required to go through a full judicial foreclosure rather than a simple forfeiture. Foreclosure is slower and more expensive for you, but it gives the buyer more protection, including the right to any surplus if the property sells at auction for more than the contract balance. The flip side: if the auction price falls short, the seller can sometimes pursue the buyer for the difference. Know your state’s approach before signing, because it shapes your exit if things go wrong.
Federal Limits on Seller Financing
Federal rules apply to sellers who finance property sales, though occasional sellers get significant exemptions. Under the Dodd-Frank Act, a property owner who provides financing for no more than three properties in any twelve-month period is generally exempt from the loan originator licensing requirements that apply to professional lenders. A seller does not become a “creditor” subject to the full ability-to-repay analysis under federal lending rules unless they finance more than five properties in a calendar year.
Even under the exemptions, basic standards apply. If you include a balloon payment and rely on the seller financing exemption, the terms still have to be structured reasonably. Cross the threshold into creditor status and the full weight of federal mortgage lending regulation applies, including verifying the buyer’s ability to repay. Most homeowners selling a single property will not hit these limits, but investors who regularly use seller financing should get an attorney’s read on compliance.
Sign, Notarize, and Record
Both parties sign the completed contract in front of a notary public. The notary verifies identity and confirms the signatures are voluntary. That step is what prevents either party from later claiming they never signed or were impersonated. Notary fees for residential documents are modest and vary by state.
After notarization, record the contract with the county recorder’s office or registrar of titles. Recording puts the buyer’s interest on the public record, which is the buyer’s main protection against you trying to sell the same property again or taking on new liens. It protects you too, by locking the date and terms of the agreement into the public record. Filing fees vary by county and some jurisdictions add surcharges, so check with your local recorder before you go. Many offices now accept electronic filings.
Once recorded, the office returns a stamped copy with a document identification number. Both parties should keep it. For the buyer, that stamped copy is proof of their equitable interest in the property for as long as the contract runs.
Managing the Property During the Payment Period
While the contract is active, ownership effectively splits. The buyer holds equitable title — the right to live there, make improvements, and build equity through payments. You keep legal title, so the property remains in your name on the official deed until the contract is satisfied. A few practical items should be nailed down in the contract itself.
Property taxes. Specify who pays. In most arrangements the buyer takes this on, since they occupy the home. Falling behind on property taxes can trigger a default under the contract and, in extreme cases, a tax sale by the municipality that wipes out both parties’ interests. Many states let buyers holding equitable title claim homestead exemptions, though the specifics differ by jurisdiction.
Insurance. The buyer typically carries homeowners coverage, but you should be named on the policy as a loss payee. That status means the insurer will pay you directly for your financial interest if a covered loss occurs. Without it, a fire or storm can destroy your collateral while the insurance proceeds go entirely to the buyer. Verify the policy is active every year.
Maintenance. Day-to-day upkeep falls on the buyer. Many contracts also give the seller a right to inspect the property periodically to confirm the collateral is not being neglected. Include it. A buyer who lets the roof deteriorate for five years is putting your security at risk.
Reporting the Sale on Your Taxes
The IRS treats a contract sale as an installment sale unless you elect otherwise. That means you report the gain gradually as payments come in, rather than all at once in the year of sale. Each payment, after subtracting the interest portion, gets split into a tax-free return of your original basis and a taxable gain, calculated using a gross profit percentage.5Internal Revenue Service. Publication 537 (2025), Installment Sales
You report installment sale income on Form 6252 in the year of sale and every year after until the final payment is received, even in years no payment arrives.6Internal Revenue Service. Form 6252, Installment Sale Income The gain flows to Schedule D or Form 4797 depending on whether the property was a personal residence or an investment. You can elect out of the installment method and report the entire gain in the year of sale, but that election cannot be reversed.5Internal Revenue Service. Publication 537 (2025), Installment Sales
The interest portion of each payment is separate. Report it as ordinary income on Schedule B. Set the contract rate below the AFR and the IRS will impute additional interest income to you no matter what the contract says.5Internal Revenue Service. Publication 537 (2025), Installment Sales If the property was held as a trade or business asset and you receive $600 or more in interest during the year, you must also file Form 1098 to give the buyer a record of interest paid. Sellers of a former personal residence are not required to file Form 1098.7Internal Revenue Service. Instructions for Form 1098
Delivering the Deed at Payoff
When the buyer makes the final payment or satisfies the balloon, you are obligated to execute a warranty deed transferring full legal title. Record that warranty deed in the same county office where the original contract was filed. Recording officially ends the split-ownership arrangement and gives the buyer complete ownership, and at that point you have no further claim to the property. If a seller refuses or is unable to deliver the deed, the buyer can petition a court to compel the transfer, since the recorded contract establishes their equitable interest. Build the obligation and a specific delivery timeline into the contract from the start, and the finish line stays clean.