One of the most important variables in a seller-financed deal is the down payment. That might sound obvious — bigger is better — but there are several reasons why the size of the down payment has a major impact on the quality and long-term value of the loan. Here are a few things worth keeping in mind:
1. Skin in the Game
The larger the down payment, the more skin in the game the borrower has.
When someone puts meaningful cash into a property, they are far less likely to walk away from it. If the borrower has little or nothing invested, default becomes much easier — which can leave you dealing with the legal process of clearing title and taking the property back. A strong down payment aligns incentives. The borrower has something to lose.
2. It Signals a Serious Borrower
This is a more subtle point, but it matters. Borrowers who have the cash available and are willing to put it down are generally more serious buyers. They tend to follow through on the underwriting and origination process.
On the other hand, when someone has very little cash in the deal — sometimes not even earnest money — it’s much easier for them to walk away during the process and leave you starting over with a new buyer.
3. It Helps Prevent Rent Skimming
Over the years I’ve run into several loans where the borrower wasn’t living in the property and instead rented it out and stopped making payments.
This is called rent skimming — the borrower collects rent but doesn’t pay the note and simply waits for the foreclosure process. A meaningful down payment helps discourage this behavior. Someone who has real money invested is has something to lose if they do this.
4. Down Payment Drives Note Value
This is a big one that many investors overlook. When you originate a seller-financed loan, down payment size and credit score are two of the biggest drivers of note value.
At some point most investors want to recapitalize their loans. That could mean:
- Selling the note
- Borrowing against the loan
- Using it as collateral in another structure
If the loan has strong fundamentals — including a solid down payment — it becomes much more bankable and opens the door to those options. Small down payments significantly limit your flexibility.
5. Protection if Property Values Fall
Property values can go down. In the Denver area where I live they certainly have in the last year or so. If the borrower only has a very small down payment, it becomes easy for them to end up upside down on the loan. This is especially true in seller financing where properties are typically sold somewhat above current market value. When borrowers are upside down, default becomes much more likely.
So What Is a Good Down Payment?
Based on the loans I regularly see as a percentage of the sale price:
- 8–10% down – very common range
- 10%+ – solid target
- 15% – excellent
- 20% – outstanding, but not very common in seller finance
I also see plenty of deals done with 3–5% down. Sometimes that’s necessary if it’s the only way to sell the property. Just understand that when you go that route default risk is higher and recapitalizing the loan later becomes more difficult
At the end of the day, the down payment isn’t just about getting some cash up front (although it is nice). It affects borrower behavior, loan performance, and the long-term value of your note. If you can consistently structure deals with strong down payments, you’ll end up with much better assets in your portfolio.