Seller financing vs. a bank DSCR loan

The short answer

Seller financing and a bank DSCR loan solve different problems.

A seller note is flexible. The seller can accept a lower down payment, a higher rate, a short balloon, or a below-market rate to get the deal done. The buyer avoids a bank’s underwriting at closing. The seller becomes the lender.

A bank or DSCR loan is standardized. The lender applies a DSCR test, an LTV limit, credit and reserve requirements, and a closing process. The buyer usually needs a larger down payment, but the loan can be a long-term fixed-rate solution with no balloon.

The right choice depends on the deal, not on which option sounds cheaper.

Compare the same property both ways

Use the example from the seller financing calculator:

Item	Seller note	Bank or DSCR loan
Purchase price	$285,000	$285,000
Down payment	20% ($57,000)	25% ($71,250)
Loan amount	$228,000	$213,750
Rate	7.00%	6.75%
Term	30-year amortization, 5-year balloon	30-year amortization
Monthly payment	$1,516.89	$1,386.38
Monthly cash flow	$225.61	$356.12
DSCR	1.15x	1.26x
Balloon	$214,620	None

The bank loan has a lower payment because the loan is smaller and the rate is slightly lower. It also requires $14,250 more cash at closing. The seller note has a higher payment and a balloon, but the buyer keeps more cash upfront.

Neither column is automatically better. The lower payment does not help if the buyer cannot raise the extra down payment. The higher seller-note payment does not help if the balloon refinance fails.

The DSCR test is not the only test

Lender DSCR is usually qualifying rent divided by PITIA. Investor DSCR is NOI divided by annual debt service. They answer different questions.

• Lender DSCR: Will the lender approve the loan?
• Investor DSCR: Does the property cover its operating costs and debt from its own income?

A seller note can close without a lender DSCR test, but the buyer should still run both ratios. If the rent barely covers the seller note, the deal has little room for vacancy, repairs, or a rate increase at the refinance.

The bank loan in the example has a higher DSCR because the loan is smaller. That is not a free improvement: the buyer had to bring more cash to closing. Compare the DSCR improvement with the opportunity cost of the extra down payment.

Cash to close and reserves

Seller financing often wins on cash to close. The buyer may need:

• A negotiated down payment.
• Closing costs.
• Rehab or make-ready cash.
• Reserves for the first payments.

A bank loan adds:

• A larger down payment.
• Lender fees and points.
• Appraisal, title, and other third-party costs.
• Cash reserves.
• Often a higher credit and documentation burden.

The seller should also count the cash it does not receive at closing. In the example, the seller receives the down payment but carries a $228,000 note. The seller’s return depends on the note rate, the balloon, the buyer’s credit, and the tax treatment.

Balloon risk vs. permanent financing

A seller note with a 5-year balloon is a short-term financing commitment. The buyer must refinance, sell, or pay the balance. A bank loan can be a 30-year amortizing loan with no balloon.

That difference matters most when:

• The property has not stabilized.
• The buyer’s credit or income is still improving.
• Rates are volatile.
• The property’s DSCR is thin.
• The buyer has no reserves for refinance costs.

A seller note can be a good bridge when the buyer needs time. It is a poor permanent solution if the buyer has no credible refinance path.

Tax differences

The seller’s tax position can influence the negotiation.

• A cash sale taxes the gain at closing, subject to recapture and other rules.
• An installment sale can spread gain recognition as principal is received.
• The seller may pay tax on interest as ordinary income.
• Depreciation recapture is generally accelerated.

The buyer’s tax position is different. The buyer may deduct mortgage interest, property taxes, and depreciation, subject to the tax rules. The calculator does not model the buyer’s income tax; it focuses on the seller’s installment-sale estimate.

A seller who values deferral may accept a lower rate or a longer note. A seller who needs liquidity may prefer a smaller note, a shorter balloon, or a cash sale. The tax tail should not wag the deal dog, but it belongs in the comparison.

When seller financing fits

Seller financing can make sense when:

• The property is hard to finance conventionally.
• The seller wants a higher total return than a cash sale.
• The buyer has a strong down payment but a temporary income or credit issue.
• The buyer needs to complete a rehab or stabilize the rent before a refinance.
• The seller wants to spread gain recognition.
• Both sides understand the balloon and the exit.

It is a weaker fit when:

• The seller needs all the cash now.
• The buyer has no refinance path.
• The property needs major work with uncertain costs.
• The buyer’s DSCR is already thin at the seller-note payment.
• The parties are using consumer-purpose financing without professional guidance.

When a bank or DSCR loan fits

A bank or DSCR loan can make sense when:

• The buyer can meet the down payment and reserve requirements.
• The property’s rent supports the lender’s DSCR.
• The buyer wants a long-term fixed-rate loan with no balloon.
• The buyer values speed and certainty less than permanent financing.
• The property is in a condition and market that lenders will accept.

The trade-off is usually cash and documentation. The benefit is a known long-term payment and no refinance deadline.

A practical comparison checklist

Before choosing a structure, compare:

1. Cash to close, including down payment, closing costs, and reserves.
2. Monthly payment and PITIA.
3. Lender DSCR and investor DSCR.
4. Balloon amount and refinance date.
5. Refinance cash-out or cash needed at a flat value.
6. After-tax proceeds for the seller.
7. Prepayment penalties, extension fees, and default terms.
8. Legal and tax review for the specific deal.

The seller financing calculator puts the seller note and a bank loan side by side. Use the DSCR calculator for a deeper lender-coverage test before you commit.