Seller Financing in Colorado: A Beginner's Guide for Sellers

Seller financing in Colorado means you sell the house, deed it to the buyer at closing, and take back a promissory note secured by a deed of trust recorded with the county clerk and recorder. The buyer pays you monthly instead of a bank, and if the payments stop, the county public trustee forecloses on your behalf. It works for a seller who owns the home free and clear, wants monthly income, and has a buyer who cannot get a bank loan today.

This guide covers the Colorado documents, the federal Dodd-Frank limits on how many homes you finance and whether a balloon is allowed, the terms Front Range sellers ask for, servicing, default, taxes, and what the note is worth if you sell it later.

How seller financing works in Colorado

Colorado is a deed of trust state, not a mortgage state. Three documents do the work:

• The contract: the Colorado Real Estate Commission's Contract to Buy and Sell with the Seller or Private Financing Addendum attached. The addendum spells out the loan amount, rate, payment, term and balloon before either side signs.
• The promissory note: the buyer's written promise to pay you. You keep the original.
• The deed of trust: the lien on the house, naming the public trustee of the county as trustee. The title company records it the day of closing, right after the deed to the buyer.

The buyer owns the house from closing day. You own a lien. That is the difference between seller financing and a land contract, where the seller keeps title until the last payment; Colorado buyers and their attorneys push back on land contracts, and note buyers pay far less for them.

General real estate guides describe seller financing as one national product. The Colorado version has its own forms and its own foreclosure path, and both work in your favor as the lender.

When seller financing makes sense for a Colorado seller

• You own the home free and clear. No bank loan means no due-on-sale clause and no wraparound.
• The property is hard to finance. A condo in a building that fails conventional warrantability, a mountain home on a well and septic with an expired permit, a mixed-use property in Denver, or vacant land in Elbert or Weld County.
• The buyer is strong but unbankable this year. Self-employed with one year of returns, a recent job change, or a credit event 2 to 3 years old.
• You want income, not a lump sum. A note at 7% to 9% on $400,000 pays more per month than the same cash in a savings account, and the installment method spreads the capital gains tax over the life of the note.
• The listing has sat. Owner terms widen the buyer pool on a home that has been on the Denver metro market past 60 days.

Sites such as Sell with Seller Financing list owner-terms homes nationally. On the Front Range the Kenna Real Estate Group markets the terms in the MLS remarks and on the listing page so buyers searching for owner carry find the home.

The Dodd-Frank limits: three properties and balloons

Under the federal Truth in Lending Act rules that followed Dodd-Frank, a seller who finances a home the buyer will live in is exempt from mortgage loan originator licensing only inside one of two exclusions:

Above those limits, or on a fourth home in a year, a licensed mortgage loan originator has to originate the loan. The Colorado Division of Real Estate licenses them. The rules apply to owner-occupied homes; a note on a rental or on vacant land is a commercial loan and sits outside them.

Terms Front Range sellers ask for

• Down payment: 10% minimum, 20% preferred. The down payment is your equity cushion and the first thing a note buyer checks.
• Interest rate: 1 to 3 points above the going 30-year bank rate. Colorado has no usury cap below 45% on a written contract, so the rate is a negotiation, not a legal ceiling.
• Amortization: 30 years keeps the payment affordable. Under the three-property exclusion the note runs the full term; under the one-property exclusion a balloon at year 5, 7 or 10 is common.
• Late fee: 5% of the payment after a 10-day grace period, written into the note.
• Taxes and insurance: the buyer pays both; you require proof each year and are named as loss payee on the hazard policy. On the Front Range that policy has to cover hail, and on a mountain property, wildfire.
• Due-on-sale: the note is due in full if the buyer sells or transfers the house.

Financing a home that still has a mortgage

Nearly every bank deed of trust in Colorado has a due-on-sale clause: transfer the house and the bank has the right to call the loan. A wraparound, where the buyer pays you and you keep paying the bank, transfers the house and triggers that clause. The bank does not have to call the loan, and the risk sits with you and the buyer. The clean version of seller financing is a free-and-clear house, or a payoff of the bank loan from the buyer's down payment at closing.

Servicing the note

Use a third-party note servicer from day one. The servicer collects the payment by ACH, posts it to a ledger, pays taxes and insurance from escrow if you set one up, sends the buyer a year-end Form 1098 and sends you a 1099-INT. Cost is $20 to $40 a month. The ledger is the document that lets you sell the note later, refinance the buyer out, or prove a default to the public trustee.

When the buyer stops paying

Your remedy is the public trustee foreclosure. You file a Notice of Election and Demand with the public trustee of the county where the house sits, file for an order authorizing sale under Rule 120 in district court, and the trustee sells the house 110 to 125 days after the notice records on a residential property. The buyer keeps the right to cure by paying the arrears up to 15 days before the sale. The Colorado foreclosure process and timeline post lists each step.

Most defaults never reach a sale. A forbearance that adds missed payments to the balance, or a deed in lieu where the buyer hands the house back, resolves the file in 30 to 60 days. With 20% down and a recorded first deed of trust, you get the house back with equity.

What the note is worth if you sell it

Note buyers pay 80% to 95% of the unpaid balance for a first-lien Colorado note with a recorded deed of trust, 12 or more on-time payments and a balance under 80% of the home's value. Rate, term, borrower credit and lien position move the price. The full pricing checklist is in Is your Colorado mortgage note sellable. Writing the note to those standards on day one is what makes it worth full value later.

Taxes on a Colorado seller-carry sale

Interest you collect is ordinary income, reported on Schedule B. The gain on the sale is reported on IRS Form 6252 as an installment sale, so you pay capital gains tax only on the principal collected each year. The federal exclusion of $250,000 of gain for a single filer and $500,000 for a married couple still applies if the home was your primary residence for 2 of the last 5 years. A nonresident seller is subject to Colorado's 2% withholding at closing on a sale over $100,000, calculated on the sale price or net proceeds, whichever is less. A Colorado CPA runs the year-one numbers before you sign the addendum.

Inspection and disclosure still apply

Seller financing changes who lends, not what you disclose. The buyer gets the Colorado Seller's Property Disclosure, the lead-based paint disclosure on a pre-1978 home, an inspection period and a title commitment. Colorado custom has the seller buy the owner's title policy; require the buyer to buy a lender's policy naming you, so your lien is insured the same way a bank's is. The how to sell a house in Colorado guide walks through each contract deadline.

Rent-to-own, assumptions and the bank alternative

Rent-to-own is not seller financing. The tenant leases, holds an option to buy, and gets no deed until the option closes; you stay the owner and the landlord. It suits a buyer who is 12 to 24 months from qualifying. The Colorado rent-to-own page explains the option structure.

An assumable loan is the third path: an FHA or VA loan on your house passes to a qualified buyer at its original rate, with the lender's approval, and you carry only a second note for the gap. See the Colorado assumable mortgage guide.

Before carrying the note, find out whether the buyer qualifies for a bank loan today. Mike Oswald, VP of Mortgage Lending at Rate, NMLS 261003, Equal Housing Lender, pre-qualifies Colorado buyers for conventional, FHA and VA loans, including buyers with one year of self-employment. You are free to use any lender. A buyer who qualifies pays you in full at closing with no note to service. Details on the Colorado home financing page.

Where to go next

• Seller financing homes explained: owner carry in Colorado
• Owner carry homes for sale in Colorado
• How to sell a mortgage note in Colorado
• Pricing your Colorado home to sell
• The Colorado Home Seller's Guide
• Kenna Real Estate Group agents

Talk to the Kenna Real Estate Group

The Kenna Real Estate Group at Keller Williams DTC prices the home, writes the owner-terms offer into the listing, screens the buyer's credit and down payment, and closes the note and deed of trust through a Colorado title company. Call or text 303-955-4220. A live person answers. Not a robot, not a phone tree. Buyers looking for owner terms can search every home for sale in Colorado.