In some areas, a popular form of purchase money
financing is the land contract. 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
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.
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.
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
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.