How to Vet a Buyer Before You Carry the Note

Vet a seller-financing buyer the way a careful lender would. Collect a completed financial information sheet, verify income and savings with documents, review credit with written permission, and test the payment against the buyer's real budget. If your deal relies on the Reg Z three-property exclusion, a good-faith ability-to-repay check is part of the exclusion itself.

When you carry the note, you are the bank. The bank's first job is deciding who to lend to. A missed payment on your note is your problem, not a lender's. Foreclosure takes time and money, and the home may come back in worse shape. Screening is the cheapest protection you will ever buy. This article walks through the legal piece first, then the practical one. For the bigger picture, start with the complete guide to seller financing in Utah.

What does the three-property exclusion require the seller to check about ability to repay?

It requires a good-faith determination that the buyer has a reasonable ability to repay 12 CFR § 1026.36(a)(4). That condition comes with others: three or fewer properties in 12 months, no balloon, and a fixed rate or one fixed for five years.

Federal rules separate sellers who finance their own property from professional loan originators. Two exclusions do the separating. The three-property exclusion covers any person, including an entity, financing three or fewer owned properties in 12 months 12 CFR § 1026.36(a)(4). The one-property exclusion covers a natural person, estate, or trust financing one owned property in 12 months 12 CFR § 1026.36(a)(5).

The difference matters for screening. The one-property exclusion permits a balloon and requires no ability-to-repay determination 12 CFR § 1026.36(a)(5). The three-property exclusion forbids a balloon and does require the good-faith check 12 CFR § 1026.36(a)(4).

There is a separate federal ability-to-repay rule for creditors. A seller below the creditor threshold is not governed by that rule 12 CFR § 1026.43. Most one-time home sellers sit below that threshold. So for many sellers, the screening question comes from the exclusion they rely on, not from the general rule.

Here is how that plays out. Say an LLC sells two rentals this year with seller financing. It cannot use the one-property exclusion, because that one is limited to a natural person, estate, or trust. If it relies on the three-property exclusion, the good-faith ability-to-repay determination becomes part of the deal. Document it. A short written file showing what you reviewed is what "good faith" looks like on paper.

Not sure which exclusion fits you? Run your facts through the Dodd-Frank and Utah licensing checker. The Dodd-Frank, SAFE Act, and 61-2c guide explains each condition in more detail.

What does the state Buyer Financial Information Sheet collect?

It is a state-approved form for gathering the buyer's financial information in one place Buyer Financial Information Sheet (Jan. 1, 1999). The current version is dated January 1, 1999. Sellers and agents typically use it as the starting point for screening.

The form is a self-report. The buyer fills it out and signs it. In practice, it gives you a consistent snapshot: who the buyer is, where the income comes from, and what debts already compete for the buyer's paycheck. You can find it with the other state-approved forms on our Utah seller financing forms page.

Treat the sheet as a map, not as proof. A buyer can write anything on a form. Its real value is that it tells you which documents to ask for next. If the sheet lists $7,500 a month in wages, you now know what pay stubs should show. If it lists no car loan, you know what the credit report should confirm.

One practical tip: ask for the sheet early, before you negotiate terms. A buyer who balks at a one-page financial form is telling you something useful.

Which documents should a buyer provide: income, credit, bank statements?

Ask for all three: proof of income, a credit report, and two to three months of bank statements. Add tax returns for self-employed buyers. Ask for the source of the down payment as well.

Here is what a typical screening file looks like, and what each document tells you.

Then do the math. Take a $420,000 home with $42,000 down and a $378,000 seller-carried note at 7% over 30 years. Principal and interest run about $2,515 a month. Add property taxes and insurance of about $5,400 a year, and the monthly housing payment nears $2,965. If the buyer's documented gross income is $9,000 a month, housing alone takes about 33% of it. Add a car loan costing $7,200 a year, and total monthly debts reach about 40%. You can decide what ratio you accept. Just decide it with real numbers. The seller-carry calculator helps you test different rates and terms.

Can a seller legally skip a credit check, and should they?

Under the one-property exclusion, no ability-to-repay determination is required, so skipping it is possible 12 CFR § 1026.36(a)(5). Whether you should is a different question. Usually you should not.

"Legally allowed to" and "actually goes well" aren't always the same thing. The law sets a floor for some sellers. It does not tell you whether this buyer will pay you for 30 years.

A credit report is cheap compared with a foreclosure. In practice, a seller who skips screening is relying entirely on the down payment and the trust deed. Those protections are real. They are also slow, and they cost money to enforce.

There are two practical ways to get credit information. Some sellers ask the buyer to pull their own report and share it. Others use a tenant or credit screening service, with the buyer's signed written authorization first. Either way, get permission in writing before anyone pulls a report. Keep the report private, and shred or securely delete it when the deal closes or dies.

A low score does not have to end the conversation. Some buyers come to seller financing because a bank said no. What matters is why. A medical collection from four years ago is different from three late car payments last spring. Ask the buyer to explain anything that stands out, and weigh the explanation against the documents.

If you do decide to accept a weaker credit file, price that risk in the terms, not in hope. A larger down payment, a shorter term, or a higher rate are the usual tools. Your attorney can help you set terms that fit the exclusion you rely on.

What screening red flags matter most?

The red flags that matter most are a buyer who resists documentation, income that cannot be verified, a down payment with no clear source, and pressure to close fast. Any one deserves a closer look before you sign.

Here are the patterns that typically show up before a seller-financed note goes bad.

• Reluctance to document. "Just trust me" is not an income source.
• Income that does not reconcile. Bank deposits should roughly match stated pay.
• A borrowed down payment. If the $42,000 down came from a new personal loan, the buyer now carries two debts.
• Large unexplained deposits. Ask where a sudden $25,000 deposit came from.
• Recent late payments. Late rent or a late car payment in the last year predicts more of the same.
• Pressure on the timeline. A buyer who needs to close in ten days may be avoiding questions.
• Requests to skip the paperwork. Asking to close without a recorded trust deed protects the buyer, not you.
• A thin down payment. The less the buyer puts in, the less they lose by walking away.

That last flag deserves emphasis. On a $420,000 home, $10,000 down gives the buyer little to protect. If values dip, the buyer may owe more than the home is worth. A buyer with $63,000 down has every reason to keep paying.

None of these flags is automatically disqualifying. Each one is a reason to ask a follow-up question and wait for documents.

How do you put the screening steps in order?

Screen in a fixed order: collect the information sheet, gather documents, review credit with permission, test the payment, then set terms. Doing it in order keeps you from negotiating terms before you know who you are lending to.

1. Step 1
   Collect the information sheet
   Ask the buyer to complete and sign the state Buyer Financial Information Sheet before you negotiate terms.
2. Step 2
   Gather documents
   Request pay stubs, W-2s or tax returns, two to three months of bank statements, and photo ID.
3. Step 3
   Review credit with written permission
   Get the buyer's signed authorization, then review a current credit report or have the buyer share one.
4. Step 4
   Test the payment
   Compare the full housing payment and existing debts against documented income, not stated income.
5. Step 5
   Document your decision
   Keep a short written file showing what you reviewed and why you decided the buyer can repay.
6. Step 6
   Set terms that match the risk
   Adjust the down payment, rate, and term to the file, and confirm the terms fit the exclusion you rely on.

Step 5 matters most if you rely on the three-property exclusion 12 CFR § 1026.36(a)(4). A written file is how you show the determination was made in good faith. Even under the one-property exclusion, the same file helps you remember why you said yes.

What Greg would tell you

Screen the buyer before you talk about rate, because the rate cannot fix a buyer who cannot pay. Get documents, not promises, and keep a short written file of what you reviewed. If something in the file worries you, ask for more down rather than hoping it works out.

This site is for general information about Utah law and is not legal advice. Using it does not create an attorney-client relationship. Every transaction is different — talk to an attorney about yours. Attorney advertising.