Seller financing in Colorado lets a property owner act as the lender on their own sale, taking a promissory note and a deed of trust from the buyer instead of cashing out through a bank. It’s legal, it’s common, and it’s governed by a stack of rules that reach from Colorado’s Uniform Consumer Credit Code up to federal mortgage-licensing law. Miss one and a seller can lose the right to collect interest, trigger the acceleration of an existing mortgage, or in the worst case, face criminal exposure.
Here’s what a seller needs to get right.
How Much Interest You Can Charge
Colorado’s Uniform Consumer Credit Code caps the finance charge on a consumer credit sale. Under C.R.S. § 5-2-201, the maximum is the greater of a graduated rate — 36% per year on the first $1,000 of the unpaid balance, 21% on the portion between $1,000 and $3,000, and 15% on everything above $3,000 — or a flat 21% per year on the entire unpaid balance.1FindLaw. Colorado Revised Statutes Title 5 Consumer Credit Code 5-2-201 Revolving credit accounts cap at 21% per year. Most residential seller-financed deals sit well below these ceilings, but structuring a high-rate deal without running the graduated math is a common error.
For non-consumer loans — think commercial or investment real estate rather than a personal residence — Colorado sets a separate ceiling of 45% per year under C.R.S. § 5-12-103. Exceeding that non-consumer cap is a Class 6 felony, punishable by 12 to 18 months in prison and fines up to $100,000.
What Happens if You Overcharge or Skip Disclosures
Under C.R.S. § 5-5-201, a buyer who has been overcharged owes nothing on the excess and can demand a refund. If the seller refuses to refund within a reasonable time, the buyer can recover a court-determined penalty up to the greater of the total finance charge or ten times the excess amount.2Justia Law. Colorado Revised Statutes Section 5-5-201 – Effect of Violations on Rights of Parties For serious violations involving unauthorized supervised lending, the buyer can be relieved of the entire finance charge and recover up to three times that amount as a penalty.
Disclosure failures are just as expensive. If a seller repeatedly fails to give the buyer a statement of the annual percentage rate or finance charge as required by C.R.S. § 5-3-101, and has been warned by the state administrator, any later failure relieves the buyer of the obligation to pay any finance charge on that transaction.2Justia Law. Colorado Revised Statutes Section 5-5-201 – Effect of Violations on Rights of Parties Skip the paperwork and you can lose your interest income entirely.
Do You Need a Mortgage License?
Federal law treats anyone arranging mortgage financing as a “loan originator” subject to licensing. The Consumer Financial Protection Bureau carved out two exemptions for sellers, and which one fits depends on how many properties you finance in a year.
- A natural person, estate, or trust that finances only one property sale in any 12-month period is exempt. The loan cannot result in negative amortization, and the rate must be fixed or adjustable only after five or more years with reasonable caps. Balloon payments are allowed, and there is no requirement to verify the buyer’s ability to repay.3eCFR. 12 CFR 1026.36 – Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling
- A person, estate, trust, or entity that finances three or fewer sales in any 12-month period is also exempt, but with tighter conditions. The loan must be fully amortizing with no balloon, and the seller must determine in good faith that the buyer has a reasonable ability to repay.3eCFR. 12 CFR 1026.36 – Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling
Both exemptions require the seller to actually own the property and to not have been the general contractor who built the residence. Any adjustable rate must be tied to a widely available index like U.S. Treasury securities or SOFR and include reasonable annual and lifetime caps.
Colorado has its own parallel exemption. Under C.R.S. § 12-10-709, a person, estate, or trust that finances no more than three property sales in any 12-month period is exempt from state mortgage loan originator licensing, provided each property is owned by the seller and secures the loan.4Justia Law. Colorado Revised Statutes Section 12-10-709 – Exemptions A separate exemption covers financing provided to a family member for up to three loans per year, so long as the individual receives no compensation beyond interest on the loan.
The Colorado Division of Real Estate has said a licensed real estate broker representing a seller in an exempt transaction is also exempt from MLO licensing, but the broker’s role stays on the real estate side. Offering or negotiating financing terms crosses into mortgage origination.5Division of Real Estate. Position Statement 1.4 – MLO and Mortgage Company Exemptions Exceed the exemption or step outside its scope and disciplinary action, fines, and restitution are on the table.
The Due-on-Sale Trap
This is where seller-financed deals most often blow up. If the seller still carries a mortgage on the property, that mortgage almost certainly contains a due-on-sale clause allowing the lender to demand full repayment when the property is sold or transferred. Federal law under 12 U.S.C. § 1701j-3 explicitly permits lenders to enforce these clauses.6Office of the Law Revision Counsel. 12 US Code 1701j-3 – Preemption of Due-on-Sale Prohibitions
Finance a sale without paying off the existing mortgage and the original lender can call the entire balance due immediately. If the seller can’t pay, the lender forecloses. The buyer, who has been paying the seller faithfully, can lose the home through no fault of their own. Some sellers try to structure the deal quietly to keep the lender in the dark, but that gamble puts the buyer’s home at risk.
Federal law does bar enforcement of the clause in specific situations: transfers on divorce or legal separation, transfers to a spouse or children, transfers on the death of a joint tenant, and transfers into a living trust where the borrower remains the beneficiary.6Office of the Law Revision Counsel. 12 US Code 1701j-3 – Preemption of Due-on-Sale Prohibitions A standard sale to an unrelated buyer fits none of these. The clean path is to pay off the existing mortgage at closing.
The Two Documents You Need
Promissory Note
The promissory note is the buyer’s written promise to repay. It spells out the total purchase price, the down payment, the interest rate, and the repayment schedule showing how each payment splits between principal and interest. It should address late fees, grace periods, and what counts as a default. This document is not recorded and remains a private contract between buyer and seller. The seller must keep the original safe — it is the primary evidence of the debt and is required to start foreclosure if the buyer stops paying.
Deed of Trust
The deed of trust is the security instrument that gives the seller a lien on the property. In Colorado, the buyer (the grantor) conveys legal title to a neutral third party, the Public Trustee, who holds it until the debt is paid. The seller is named as the beneficiary. The deed of trust must include the exact legal description of the property as it appears on the current deed. The Colorado Real Estate Commission publishes approved forms, and residential transactions should use the Public Trustee version.7Division of Real Estate. Real Estate Broker Contracts and Forms Late fee provisions and grace periods in the deed of trust must match the promissory note.
Given the stakes, having an attorney draft or at least review both documents is money well spent. Professional document preparation typically runs a few hundred dollars, and catching a single error before recording can prevent problems that cost many times that amount.
Recording
After both parties sign the deed of trust before a notary, the original goes to the County Clerk and Recorder in the county where the property sits. Colorado charges a flat recording fee of $40 per document.8Colorado General Assembly. HB24-1269 Modification of Recording Fees A documentary fee of one cent per $100 of the purchase price also applies to any transaction where consideration exceeds $500.9FindLaw. Colorado Code 39-13-102 – Documentary Fee Imposed – Amount – to Whom Payable On a $400,000 sale, that documentary fee comes to $40.
Recording creates constructive notice to the world that a lien exists on the property. Without it, the seller’s security interest is invisible to future creditors and buyers, which can leave the seller holding an unenforceable note against a property that has been resold. The clerk usually mails the original back to the beneficiary within a few weeks.
Property Taxes and Insurance During the Loan
One detail that frequently gets overlooked: who pays the property taxes and hazard insurance, and how those payments are tracked. If the buyer fails to pay property taxes, the county can place a tax lien that takes priority over the seller’s deed of trust. If insurance lapses and the home is damaged, the seller’s collateral could be worth far less than the remaining loan balance.
Two common approaches. First, an escrow account: the buyer pays a portion of the estimated annual taxes and insurance each month alongside the regular loan payment, and the seller or a third-party servicer holds those funds and pays the bills when due. Second, direct payment: the buyer pays taxes and insurance on their own. Direct payment gives the buyer more control but leaves the seller exposed if the buyer falls behind.
Either way, the promissory note or a separate agreement should state clearly which party is responsible, the method and timing of payments, and the consequences of missing them. Even when the buyer handles it directly, sellers should verify each year that taxes are current and insurance remains active. A loan servicing company can handle all of this for roughly $20 to $45 per month.
If the Buyer Defaults
If the buyer stops paying, the seller can initiate a non-judicial foreclosure through Colorado’s Public Trustee system. The process starts when the seller (or their attorney) files a Notice of Election and Demand with the Public Trustee in the county where the property is located. The Public Trustee records the notice within 10 business days.10FindLaw. Colorado Revised Statutes Title 38 Section 38-38-101 – Documents Required for Foreclosure
For residential property, the sale date is set 110 to 125 calendar days after recording. During that window, the Public Trustee mails a combined notice of foreclosure and sale to the borrower and other interested parties, and the notice is published in a local newspaper. The borrower can cure the default by paying past-due amounts, and must file a Notice of Intent to Cure at least 15 calendar days before the sale. Before the sale can proceed, the seller must also obtain an Order Authorizing Sale from the District Court through a Rule 120 hearing, which determines whether a default actually occurred. The full process typically runs four to five months for residential property.
How the IRS Treats the Sale
The IRS treats a seller-financed sale as an installment sale, meaning the seller reports gain proportionally as payments come in rather than all at once. Each year, the seller calculates a gross profit percentage by dividing total profit on the sale by the contract price, then applies that percentage to the principal payments received during the year. The result is the taxable installment sale income for that year.11Internal Revenue Service. Publication 537, Installment Sales
Interest the buyer pays is reported separately as ordinary income. That distinction matters: installment sale gain may qualify for long-term capital gains rates, while interest is always taxed as ordinary income. If any depreciation was claimed on the property, depreciation recapture must be reported in full in the year of the sale, regardless of how much cash the seller received that year.11Internal Revenue Service. Publication 537, Installment Sales
Sellers report installment sale income on IRS Form 6252 each year payments come in.12Internal Revenue Service. About Form 6252, Installment Sale Income A seller can elect out of the installment method and report the entire gain in the year of sale, but the election must be made by the due date of that year’s return, including extensions.
Minimum Interest Under the Applicable Federal Rate
The IRS publishes Applicable Federal Rates monthly, and those rates set the floor for interest on a seller-financed loan.13Internal Revenue Service. Applicable Federal Rates If the rate in the promissory note falls below the AFR, the IRS treats part of each principal payment as “unstated interest” and taxes it as ordinary income. The effect: the seller pays more tax than expected because the IRS recharacterizes principal as interest. Checking the current month’s AFR before finalizing the note takes five minutes and can save real money at tax time.