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Land Contracts
This type of financing has many of the same advantages as purchase money mortgages and trust deeds. Its main disadvantage, on compare to purchase money mortgages, is that land contracts cannot be resold to Fannie Mae although a few private secondary market investors may be willing to buy contracts.
The distinguishing feature of a land contract is that the seller retains legal title to property until the buyer has made all the payments on the contract.
In its simplest form, the land contract is made by seller who owns the property free and clear. Such a seller need only negotiate term and interest rate of the contract, along with the amount of down payment, if any.
Contract subject to existing mortgage. It is rare to find a seller whose property is not encumbered by some form of mortgage lien. When this is the case, the existing mortgage(s) must be taken into account. The simplest way to do this is to make the contract subject to the existing mortgage. The contract is written for the full purchase price, but the buyers property rights under the contract are subject to the rights of the seller's mortgagee. The seller remains liable to make the payments on the loan and the property may be foreclosed if the seller defaults. The obvious problem with this arrangement, or the buyer's point of view, is how to make sure that the seller will not default on the loan payments. If they should occur, the buyer may lose everything, the seller will no longer have title to convey after a foreclosure and a buyer will be forced to resort to a lawsuit to try to recover his or her payments on the contract. The solution is to include in the contract provision requiring the seller to make timely payments on his or her loan and allowing the buyer to make such payment directly to the lender in the seller fails to do so.
Contract escrow. One approach that is sometimes used, to make the payments on the existing mortgage, is to set up an escrow account or servicing agreement for the contract payments. This is fairly simple to do so, especially since a deed is usually placed in escrow pending completion of the contract anyway. In the contract escrow, the buyer makes payments into the escrow account, and the escrow agent pays the seller's loan payments out of the account. The balance in the account it disbursed to the seller. In this fashion, the buyer is protected from the consequences of default by the seller.
Estoppel letter. When alienation clauses do exist, most lenders will insist on renegotiation of the loan to reflect current interest rates, or demand that the loan be paid off entirely. But occasionally a lender will consent to a sale without any change in the existing mortgage. The lender's consent is given in the form of a letter, called an estoppel letter, acknowledging the transfer and waving the lender's right to accelerate the loan on account of the transfer. By writing the letter, the lender is estopped (legally prevented) from later trying to accelerate the loan on the basis of the sale.
An estoppel letter is often requested even in transaction where the underlying financing does not contain and an alienation clause. The holder of the underlying mortgage or contract is cost to state in estoppel letter the amount of outstanding principal balance and to acknowledge that alone is not in default. The buyer that has a written confirmation from the lienholder as to the amount of the obligation to buyer is planning to assume or takes subject to and is also assured the seller is current on the payments and other obligations.
Contract with the assumption of existing mortgage. If the seller does not wish to remain liable for the mortgage payments, but the buyer cannot refinance the debt, the buyer may be able to assume (take over) the seller's mortgage to pay the balance of the purchase price under a contract. In this arrangement, the buyer becomes personally liable for payment of the mortgage debt, the buyer makes one payment to the mortgage and another payment to the seller.
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