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Seller financing · 12 CFR 1026.36(a)(4)–(5)Seller financing and Dodd-Frank: the one- and three-property exclusions

A seller who carries the note is not treated as a 'loan originator' under Regulation Z if one of two exclusions fits. One property: a natural person, estate or trust that seller-finances only one property it owns in any 12-month period, did not build a residence on it in the ordinary course of business, and uses a repayment schedule without negative amortization and a fixed rate or an adjustable rate that first adjusts after five or more years with reasonable caps (12 CFR 1026.36(a)(5)). Three properties: any person that seller-finances three or fewer properties it owns in any 12-month period, did not build on them as a business, and makes the financing fully amortizing, with a good-faith determination that the buyer can reasonably repay and the same fixed-rate or 5-year ARM limits (§1026.36(a)(4)). Balloon payments are not allowed under the three-property exclusion, because the loan must be fully amortizing.

The two exclusions side by side

  1. Who

    One property: natural person, estate or trust. Three properties: any person, including a company.

  2. How many

    One property in any 12 months, or three or fewer in any 12 months – each owned by the seller and securing the loan.

  3. Builders

    Neither applies to a seller who built a residence on the property in the ordinary course of business.

  4. Payments

    One property: no negative amortization. Three properties: fully amortizing – no balloon.

  5. Ability to repay

    Three properties: the seller determines in good faith the buyer can reasonably repay.

  6. Rate

    Both: fixed, or adjustable only after 5+ years with reasonable annual and lifetime caps, on a widely available index.

Papers a seller-financed sale usually needs

  • The promissory note and the deed of trust or mortgage securing it.
  • The buyer's income and debt information the seller relied on, when the three-property exclusion is used.
  • An amortization schedule showing the loan pays off with no balloon (three properties) or no negative amortization (one property).

What the TC keeps on the file

  • The seller financing addendum and who prepared the note – an attorney, not the TC.
  • Whether a prior lien stays in place; the lender's due-on-sale clause still applies to a sale.
  • The recording of the deed and the deed of trust at closing.

Questions owners ask

Can I do owner financing with a balloon payment?

Not under the three-property exclusion, which requires full amortization (12 CFR 1026.36(a)(4)); the one-property exclusion requires only no negative amortization, so a balloon is not ruled out by that rule.

How many seller-financed sales can I do per year?

The exclusions cover one property in any 12-month period for a person, estate or trust, or three or fewer for any person (§1026.36(a)(4)–(5)).

Do I have to check the buyer's ability to repay?

Under the three-property exclusion, yes – the seller must determine in good faith the buyer has a reasonable ability to repay (§1026.36(a)(4)(iii)(B)).

Related guides

Track the note, deed of trust, amortization schedule and attorney review as documents and tasks with due dates in ClosingCode.

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Source: 12 CFR 1026.36(a)(4) and (a)(5) (Regulation Z, eCFR, read October 25, 2026).

General information, not legal advice. ClosingCode is software; it is not a law firm, lender or brokerage. Seller financing can also be governed by other federal and state rules – have an attorney review the note and deed of trust. This guide is not a substitute for the advice or services of an attorney.