Texas Seller Finance Notice Requirements Before Closing

Published August 4, 2026

If you are selling a Texas home and financing it yourself while an existing mortgage stays on the property, there is a statute you have to deal with before you can sign anything: Tex. Prop. Code § 5.016. It is short, it is specific, and it runs on a seven-day clock that starts before the earliest of your closing or the signing of the contract that binds the buyer. Miss it and you have not voided the sale — but you have handed the buyer a termination right and, in a wrap, potentially a great deal more.

This page explains what § 5.016 requires, who has to receive the disclosure, what happens when it is skipped, and the two other layers of Texas law that usually apply to the same transaction at the same time.

What § 5.016 actually says

The operative language is a prohibition, not a suggestion. A person may not convey an interest in — or enter into a contract to convey an interest in — residential real property that will be encumbered by a recorded lien at the time the interest is conveyed, unless, on or before the seventh day before the earlier of:

• the effective date of the conveyance, or
• the execution of an executory contract binding the purchaser to purchase the property, an option contract, or other contract,

the person provides the purchaser and each lienholder a separate written disclosure statement in at least 12-point type.

Two details in that sentence get missed constantly. First, the clock does not run from closing; it runs from whichever comes first, the closing or the binding contract. If your buyer signs a contract on the 10th, the disclosure had to be delivered on or before the 3rd. Second, the lienholder is a required recipient. You are telling your existing mortgage company, in writing, that you intend to convey the property their lien is sitting on.

What the disclosure must contain

Section 5.016(a) enumerates the contents. The statement must:

1. identify the property and include the name, address, and phone number of each lienholder;
2. state the amount of the debt secured by each lien;
3. specify the terms of any contract or law under which the secured debt was incurred, including as applicable the rate of interest, the periodic installments required to be paid, and the account number;
4. indicate whether the lienholder has consented to the transfer of the property to the purchaser;
5. specify the details of any insurance policy relating to the property — insurer, insured, amount insured, and property insured;
6. state the amount of any property taxes due on the property; and
7. include a statement at the top of the disclosure substantially in the statutory form, warning in capitals that recorded liens have been filed against the property, that if a lien is not released and the property is conveyed without the lienholder’s consent the lienholder could demand full payment of the outstanding balance immediately, and that the buyer may wish to contact each lienholder and discuss the matter with an attorney.

Item 4 is the one that makes sellers uncomfortable, and it is the point of the statute. The Legislature is forcing a seller to put in writing, before the buyer is bound, whether the existing lender has agreed to this or not. In the overwhelming majority of owner-financed sales over an existing conventional loan, the honest answer is “no, and we have not asked.”

That answer is legal. Item 7’s warning is legal too, and it is accurate: it describes the due-on-sale exposure that sits underneath every wraparound note. Under the Garn–St Germain Depository Institutions Act, 12 U.S.C. § 1701j-3(b), a lender may enforce a due-on-sale clause notwithstanding contrary state law, and the exercise of that option is governed by the loan contract. Section 1701j-3(d) exempts a specific list of transfers — death of a joint tenant, a leasehold of three years or less without an option to purchase, a transfer to a spouse or child, a transfer incident to divorce, certain inter vivos trusts, and others — but an arm’s-length sale to an unrelated buyer is not on that list. Selling the property does not breach any law. It gives the lender a contractual right it may or may not exercise.

What happens if you skip the notice

Section 5.016(b) is deliberately measured. A violation does not invalidate the conveyance. The deed still works. What the buyer gets instead is a termination right: if a contract is entered into without the seller providing the required notice, the purchaser may terminate the contract for any reason on or before the seventh day after the date the purchaser receives the notice, in addition to other remedies provided by that section or other law.

Read that carefully. The clock does not start at closing and it does not expire on its own. It starts when the buyer actually receives a compliant notice. A seller who never delivers one has left a termination right open indefinitely, subject to subsections (c) and (d).

Subsection (d) provides a narrow safe harbor: a violation is not actionable if the person required to give notice reasonably believes and takes any necessary action to ensure that each lien for which notice was not provided will be released on or before the 30th day after title transfers. That covers the ordinary case where a lien is being paid off at closing and the release simply has not been recorded yet. It does not cover a wrap, where the whole design is that the lien stays.

The exemptions in § 5.016(c)

Section 5.016(c) lists eleven categories of transfer the section does not apply to. Paraphrased, they are transfers: under a court order or foreclosure sale; by a bankruptcy trustee; to a mortgagee or deed-of-trust beneficiary from the borrower or a successor; by a lender that acquired the property at a power-of-sale or court-ordered foreclosure or by deed in lieu; by a fiduciary administering a decedent’s estate, guardianship, conservatorship, or trust; from one co-owner to other co-owners; to a spouse or a person in the transferor’s lineal line of consanguinity; between spouses under a divorce decree or incidental property settlement; to or from a governmental entity; where the purchaser obtains a title insurance policy insuring the transfer of title; or to a person who has purchased, conveyed, or contracted to purchase or convey an interest in real property four or more times in the preceding 12 months.

Two of those deserve emphasis. The title-policy exemption in (c)(10) is why many closings that look like they should trigger § 5.016 do not — and why “we always close at a title company” is not the same thing as “the buyer got an owner’s policy.” Confirm which one is true in your file. The (c)(11) exemption keys off the purchaser’s transaction history, not the seller’s; a buyer who is an active investor is presumed not to need the warning.

The second layer: the wrap statute

If the transaction is a wraparound — new residential loan financing the purchase, existing unreleased lien for someone else’s unpaid debt, wrap note principal that includes that balance — then Tex. Fin. Code Chapter 159 applies on top of § 5.016, and it is the harsher of the two.

Section 159.104 is the provision to understand before you close a wrap. If a wrap loan closes without the required disclosure, the wrap borrower may rescind the loan agreement and the related purchase agreement at any time, in writing. If the borrower receives the disclosure after closing but before giving notice, the window narrows to 21 days after receipt. On rescission the wrap lender must return all principal and interest payments, the down payment, and earnest money, and the borrower reconveys and surrenders possession. A wrap lender can avoid rescission only by, within 30 days of the notice, paying off the underlying debt, paying delinquent taxes and assessments, paying the borrower $1,000 plus reasonable attorney’s fees, and evidencing compliance.

Chapter 159 adds three more things worth knowing. Under § 159.105, a lien securing a wrap mortgage loan is void unless the loan and the conveyance are closed by an attorney or a title company. Under § 159.151 and § 159.152, a person collecting wrap payments holds the money in trust and owes the borrower a fiduciary duty to apply it to the underlying debt, taxes, and insurance. And under § 159.202, a wrap borrower may deduct from what is owed any payment made to cure the wrap lender’s default on the underlying loan. Chapter 159 also governs who may originate a wrap at all — see RMLO licensing thresholds.

The third layer: Subchapter D, if it applies

If the deed does not transfer at closing — a contract for deed, or a lease with an option to purchase — you are in an executory contract and Subchapter D of Property Code Chapter 5 imposes a separate and much longer list of pre-signing disclosures: property condition (§ 5.069), tax certificates and insurance evidence (§ 5.070), financing terms (§ 5.071), plus recording within 30 days (§ 5.076) and an annual accounting statement each January (§ 5.077). Those duties and the reasons practitioners avoid them are covered in contract for deed vs deed of trust in Texas.

A practical sequencing note

The seven-day clock is the reason owner-financed Texas deals need to be planned backward from the contract date rather than the closing date, and the reason the lienholder’s payoff, rate, installment amount, account number, insurance details, and tax figures need to be assembled early — you cannot draft a compliant § 5.016 statement without them. Those same figures are the opening balances of the note ledger you will maintain for the life of the loan, and keeping them straight from day one is the whole premise behind OwnerNote.

Statutes change. Confirm the current text of § 5.016 and Chapter 159 against the Texas Property Code and Finance Code as published by the Legislature, and have a Texas real estate attorney review the specific transaction — particularly the exemption analysis under § 5.016(c) and whether Chapter 159 applies to your structure.