39.4% of American homeowners own their house outright. No mortgage, no lien, nothing. That is the Census Bureau's 2024 five-year estimate, up from 34.4% a decade earlier.
Sit with that, because it reframes this market. Four out of every ten owner-occupied houses in this country have no bank attached to them. The owner is the bank already. Nobody has asked them to act like one.
I'm Rob Bergeron, a licensed Kentucky Realtor and the owner of Winner Realty in Louisville. This page covers how seller financing actually works here, what federal law does and does not restrict, and the Kentucky case that makes the land contract — the instrument most courses teach — a genuinely bad choice for a Kentucky seller.
Not legal or tax advice. Talk to a Kentucky real estate attorney and your CPA. That is not a disclaimer, it is the actual recommendation.
The whole thing in one sentence
Instead of the buyer getting a loan from a bank to pay the seller, the seller becomes the bank and the buyer pays the seller.
That is seller financing. Everything else is documentation.
The paperwork
Two instruments. A promissory note — the promise to pay, with the amount, rate, term, payment and what happens on default. And a mortgage — the lien that secures it, recorded with the county clerk.
Kentucky is a mortgage state, not a deed of trust state, and foreclosure here is judicial only.
Record it. KRS 382.270 provides that no mortgage conveying legal or equitable title is valid against a purchaser for value without notice, or against creditors, until it is acknowledged and recorded — and "creditors" there means all creditors, whether or not they have obtained a lien yet. An unrecorded seller mortgage is a handshake with a stamp on it. Pew found that 10% of land contract buyers said their contract was never recorded, and another 12% did not know either way.
An attorney draws this. The Kentucky Supreme Court held in Countrywide Home Loans v. Kentucky Bar Association that a layperson may conduct a real estate closing but "may not answer legal questions that arise at the closing or offer any legal advice to the parties." KREC says flatly that it cannot draft or interpret contracts, agreements or disclosures. I have thirteen years in this business and a lot of opinions, and I still send every one of these to a Kentucky real estate attorney.
Why sellers actually say yes — and it is almost never the rate
It is the tax bill.
Under IRC Section 453 — IRS Publication 537 if you want to read it yourself — an installment sale is a sale where you receive at least one payment after the tax year of the sale, and the gain is reported under the installment method unless you elect out. You report gain as you receive it, using the gross profit percentage, on Form 6252.
Translated: a seller with a paid-off rental and a $180,000 gain can spread that gain across fifteen years instead of stacking it into one April. That is frequently the entire conversation.
Two cautions worth putting in writing. If the contract provides little or no interest, the IRS will impute it — the Applicable Federal Rates in September 2026 were 4.18% short-term, 4.49% mid-term and 5.12% long-term, so a 2% seller note invites recharacterization. And depreciation recapture can be taxable immediately regardless of the installment method. Have the seller's CPA run it both ways and elect out if that is better.
The single most useful fact if you are an investor
Regulation Z — ability-to-repay, the loan originator rules, the whole apparatus — does not apply to business-purpose credit.
12 CFR 1026.3(a) exempts credit extended primarily for a business, commercial or agricultural purpose. And the official commentary is explicit: credit extended to acquire, improve or maintain rental property that is not owner-occupied is deemed business purpose, regardless of the number of units. The occupancy test is 14 days — if the owner expects to occupy the property more than 14 days in the coming year, it is not non-owner-occupied.
So seller-financing a rental house to an investor who will not live in it sits outside TILA entirely. No ability-to-repay determination. No balloon restriction. No Reg Z loan-originator rules.
One caveat so nobody over-reads that: it is Reg Z stepping aside. State licensing is a separate regime with its own triggers. Do not assume the business-purpose exemption carries over to every rule with the word "originator" in it.
Seller-financing a house to somebody who is going to live in it is a completely different legal animal. Same house, same seller, different buyer, different universe of rules. Get that distinction right and most of the confusion on this topic evaporates.
When it is a consumer deal, there are two doors
And people state these backwards constantly.
The three-property exclusion, 12 CFR 1026.36(a)(4): three or fewer properties in any 12-month period, each owned by the seller and securing the financing; the seller did not construct the residence in the ordinary course of business; the financing is fully amortizing — meaning no balloon; fixed rate, or adjustable only after five or more years with reasonable annual and lifetime caps tied to a widely available index; and the seller determines in good faith that the buyer has a reasonable ability to repay.
The one-property exclusion, 12 CFR 1026.36(a)(5): one property in twelve months; natural person, estate or trust; same ownership and construction conditions; a repayment schedule that does not result in negative amortization — which means a balloon is permitted here; and no express ability-to-repay determination required.
Read those again and notice the inversion. If you want a balloon on a consumer deal, you are in the one-property lane. Three properties buys you volume and costs you the balloon.
Fall outside both and you are in licensed-originator territory, and the fix is to run the loan through a licensed RMLO. That is a federal licensing threshold, not a judgment call.
Land contracts in Kentucky — the part everybody gets wrong
A land contract — contract for deed, installment land contract, same thing — is where the seller keeps legal title until the buyer finishes paying.
The pitch, everywhere, is always identical: if they stop paying, you keep the house and everything they have paid. No foreclosure. Fast.
In Kentucky that has not been true since 1979.
Sebastian v. Floyd, 585 S.W.2d 381. The Kentucky Supreme Court held that forfeiture clauses in installment land contracts are not enforceable as written. The seller holds a vendor's lien and is treated as an equitable mortgagee. And the holding, in the court's own words: the seller's remedy for breach of the contract is to obtain a judicial sale of the property. The buyer's equity comes out of the proceeds.
Still good law. The Court of Appeals applied it in Slone v. Calhoun in 2012: "the forfeiture provisions set forth in the agreement are invalid as a matter of law," and "the only judicial remedy to resolve the alleged breach of the land contract between the parties is a judicial sale of the property."
So in Kentucky, a land contract gets you exactly the same remedy as a mortgage. You still foreclose. You just do it holding a worse document.
You lose clean recording, clean title and clean tax characterization, and you keep every ounce of the foreclosure timeline. Kentucky foreclosure is judicial only — a full court process, a master commissioner, appraisers, and if the property sells below two-thirds of appraised value the borrower gets a right of redemption.
In thirteen years I have not found one situation where a land contract is the better instrument for a Kentucky seller. Use a note and mortgage.
And do not let anybody tell you it works "if the contract is drafted right." Slone says invalid as a matter of law. Drafting does not fix a matter of law.
Indiana, and why the volume is remarkable
Indiana went the same direction via Skendzel v. Marshall in 1973 — land contracts treated as secured transactions requiring judicial foreclosure, with narrow exceptions for abandonment and for a buyer who has paid very little and defaults early.
Which makes this striking: Indiana recorded 31,431 land contracts between 2005 and 2024 — 90% of them residential, the sixth-most in the country despite ranking 17th in population, with 1,098 in 2024 alone. Median interest rate 7.0% against 6.1% for mortgages. Median down payment 4.8% against 7.4%. Median land contract home price $122,313 against a $207,512 statewide median.
That is our neighbors across the river, and it says two things. There is enormous unmet demand for owner-financed entry-level housing. And it is being served by a document with a documented record of harm: 14% of land contract buyers had balloon payments versus under 1% of mortgage borrowers; a quarter said the home needed major repairs; nearly half got no inspection; 73% were paying the property taxes.
On the federal side, the CFPB issued an advisory opinion in August 2024 concluding that contracts for deed are generally credit under TILA and that ones secured by a dwelling are generally residential mortgage loans under Reg Z, even where state law does not classify them as mortgages. The Bureau withdrew that opinion in May 2025 along with dozens of other guidance documents, so it is not binding guidance anymore. But the statute it was reading did not change. I would not build a business on the theory that a contract for deed escapes Reg Z because the memo saying so got pulled.
Wraparound mortgages, honestly
A wrap is where the seller carries a note that wraps around their existing mortgage — the buyer pays the seller, and the seller keeps paying the bank. It is how you sell a property with a 3% loan on it without paying that loan off.
The issue is the due-on-sale clause, 12 U.S.C. 1701j-3: a provision authorizing a lender, at its option, to accelerate if the property is sold or transferred without written consent.
The Garn-St Germain exemptions are real — subordinate liens, death of a joint tenant, transfer to a relative on death, transfer to a spouse or children, divorce decrees and property settlements, leases of three years or less without a purchase option, transfers into an inter vivos trust where the borrower remains a beneficiary.
An ordinary arm's-length sale on a wrap fits none of them.
What that means precisely: acceleration is the lender's contractual option. It is not a legal penalty and it is not a crime. It can happen. Practitioners mitigate with third-party loan servicing so payments are documented and never late, by naming the underlying lender as loss payee on the hazard policy, by disclosing in writing to the buyer that the underlying loan exists and can be called, and by keeping reserves sufficient to refinance if it is.
What I will not tell you is that it never happens. Nobody has data on how often lenders accelerate, and a prediction is not a legal fact.
How to find the four in ten
Free-and-clear owners are identified by the absence of a recorded mortgage in the Jefferson County Clerk's land records, cross-referenced against PVA ownership and assessment data. The filter that works: an out-of-county mailing address on the tax bill, a deed recorded fifteen or more years ago, and no mortgage recorded since.
One caution on that fifteen-year filter, and I mean it. A lot of those owners are older, and a terms offer is a complicated instrument with a long tail. Insist they have their own attorney and their own CPA look at it before they sign. If they will not, walk away from the deal. I have never once regretted walking and I have regretted the other thing.
Beyond that: long-tenure absentee landlords, tired landlords surfacing through code cases and eviction filings, raw land owners — where conventional financing does not exist, so terms are the only path — and expired listings, where the seller has already proven they will move on price.
And the easiest source nobody runs: search MLS remarks for "owner financing," "seller financing," "contract for deed," or "owner will carry." Those sellers have already said yes. They are waiting for somebody to ask properly.
Why I present two offers on every letter of intent
When I send an LOI, the seller gets choices.
Option one is cash — a real discount, a fast close, certainty.
Option two is terms — a substantially higher price, a modest down payment, and a note that pays them monthly and spreads the tax.
Same property. Same week. Same buyer. Two completely different answers to the question of what the seller actually needs.
And here is what thirteen years has taught me: when the terms option is priced right, most sellers take it. Not because they were talked into it. Because it fits. They wanted the price, I wanted the terms, and neither of us had to lose for the other one to win.
You cannot do that with one tool.
Frequently asked questions
How does seller financing work in Kentucky?
The seller acts as the lender. The buyer signs a promissory note setting the amount, rate, term and payment, secured by a mortgage recorded with the county clerk. Kentucky is a mortgage state with judicial foreclosure only, so a seller's remedy on default is a court process, not self-help.
Are land contracts legal in Kentucky?
Land contracts are legal but they do not work the way most courses teach. Under Sebastian v. Floyd (Ky. 1979), reaffirmed in Slone v. Calhoun (Ky. App. 2012), forfeiture clauses are invalid as a matter of law and the seller is treated as an equitable mortgagee whose only remedy is a judicial sale. A Kentucky seller gets no faster remedy from a land contract than from a mortgage.
Does Dodd-Frank prohibit seller financing?
No. Credit extended primarily for a business purpose — including financing non-owner-occupied rental property — is exempt from Regulation Z under 12 CFR 1026.3(a). For consumer deals, two exclusions apply: the three-property exclusion at 1026.36(a)(4) requires fully amortizing financing with no balloon, while the one-property exclusion at 1026.36(a)(5) permits a balloon.
Can a seller-financed note include a balloon payment?
On a business-purpose loan, yes, without Reg Z restriction. On a consumer deal, only under the one-property exclusion — the three-property exclusion requires fully amortizing financing. Most people state this backwards.
How does an installment sale affect the seller's taxes?
Under IRC Section 453, gain is generally reported as payments are received rather than all in the year of sale, using the gross profit percentage on Form 6252, unless the seller elects out. Depreciation recapture may still be taxable immediately, and below-market interest can be imputed, so a CPA should run both scenarios.
What is a wraparound mortgage and is it risky?
A wrap is a seller-carried note that wraps around the seller's existing mortgage. The risk is the due-on-sale clause at 12 U.S.C. 1701j-3, which lets the lender accelerate at its option on transfer. An ordinary arm's-length wrap fits none of the Garn-St Germain exemptions, so the exposure is real and should be disclosed in writing.
Related reading
Rent-to-own and lease options in Kentucky · Assumable mortgages in Louisville · Is wholesaling real estate legal in Kentucky?