Can I Sell My House on Land Contract With a Mortgage?

man signing mortgage contract

Land contract agreements are a blessing to many homebuyers who would otherwise be left out because they don’t qualify for mortgages.

They present a unique prospect base if you are selling your house that is easy to deal with because their relatively limited options make your offer much more appealing.

Your mortgage lender may not like your new choice of business partner, especially considering they are the kind that doesn’t meet their criteria.

If your house still has a running mortgage, you will be wondering if you can sell it on land contract. We have good news for you.

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You Can Sell Your House on Land Contract With a Mortgage

It is possible. You can even sell the house on land contract on another land contract, provided the sale doesn’t flaunt anything in the mortgage agreement.

All that is required is that your mortgage lender is fine with the transaction, and you can convince the potential buyer not to be selective about having the lender as a third party in the real estate transaction.

It is prudent to begin with a layout of how a land contract works so that we can comprehend the implications of getting into it while you still owe money on the house. It will be a bit different from how you sell a house with a mortgage the regular way. You can also look for a home buying company that offers cash for houses.

man signing mortgage contract

Selling a House on Land Contract

A land contract, installment sale, or contract for deed as it is otherwise referred to, is an alternative to your regular mortgage financing, which the seller finances. It offers opportunities for people who would otherwise not qualify for mortgages to own homes, which makes it a popular arrangement.

The homeowner gets into an agreement with the buyer that allows them to use the property as their own for a stipulated period, during which they are supposed to have paid a predetermined amount of money. At the end of the period, if the buyer has fulfilled their obligations, the legal title of the property is transferred to them, conferring full ownership of the house.

The seller issues the buyer with an equitable title that grants them the right to enjoy and use the property. It serves as evidence of the buyer’s financial interest or investment in the property. 

The seller holds on to the legal title, which has the authority to transfer ownership until the buyer’s obligation is fully satisfied. At this point, they will transfer full ownership of the house to the buyer.

What Changes When the House Being Sold on Land Contract Has a Running Mortgage?

When the house has a running mortgage, the lender places a lien on the title, and this information is open to the public. This means you will not be able to transfer the title once the contract is satisfied without input from your lender.

It also means the buyer will come across this information when conducting their due diligence, even if you are not upfront with it. Such a lack of transparency can be enough to put them off the sale. Others might want to verify your mortgage details and will likely reach out to your lender with your agreement.

The lien situation impacts the sale in several ways.

The Due-On-Sale Clause

A good number of mortgage contracts have a due-on-sale clause, allowing the lender to call the entire mortgage loan when the borrower sells the property used to secure the loan. 

One might argue that a land contract agreement is technically not a sale until the legal title changes hands. The end game is a sale, and your lender may invoke the clause once they catch wind of it.

This puts you in a situation where you must pay the outstanding loan amount in full or face harsher consequences like a short sale or foreclosure. It is all good if the outstanding mortgage amount is affordable between your cash at hand and the buyer’s deposit, as you will simply close the mortgage account and proceed with the land contract as intended.

It is good practice to go through your mortgage agreement with a fine tooth comb before engaging buyers on land contract to find out if the clause exists. It is even safer to address it before taking up the mortgage in the first place, but some mortgage lenders include it as a policy.

Increased Concerns About the Mortgage From Land Contract Buyers

A running mortgage places the potential buyer in an awkward position because it minimizes their control over the safety of their equity in a house not registered in their name.

The lender reserves the right to force a short sale or foreclose on the property for several reasons, including the due-on-sale clause. As the vendor, you may also contribute to foreclosure by failing to fulfill your obligations, even after the buyer pays you.

Some buyers, either a realtor or a cash buyer, will request information about your mortgage status as soon as they discover the running mortgage. They will want to confirm that you are up to date with your mortgage payment and that there is no outstanding foreclosure notice. 

They may even prefer to pay the lender directly using their land contract agreement, a proposal that you are not obligated to accept.

As a land contract seller, you must demonstrate that you can meet the mortgage payment obligations for the buyers’ peace of mind. This requires a solid plan.

Keeping Up With Mortgage Payments While the House Is on Land Contract

A house on land real estate contract implies that you are living elsewhere, so your current expenses may easily outstrip the mortgage expenses for the real estate in your budget. You need to be tactical to avoid the losses and bad credit that come with defaulted payments.

The land contract allows you to plan ahead and cover all your bases. The deposit is a great place to start; you can use it as a reserve for mortgage loan payments on those months that the buyer is late or is unable to come up with the monthly payments. 

Another trick is to ask for more than what your mortgage requires from the potential buyer so that you build your equity faster.

Keep in mind that it is your credit score on the line until you can fully meet your mortgage obligations. Before you hand over the legal title, your land contract buyer is as good as a lessee.

The Conveyancing Process of Selling a Mortgaged House on Land Contract

At the onset of the transaction, you as the homeowner are in possession of both the legal and equitable titles of the house. The deed is also in your name. Your mortgage lender will have placed a lien on the title, which announces to the world that they have an interest in the house.

The lien prevents you from selling or transferring ownership of the house but does not restrict you from leasing it out or issuing the equitable title to a third party of your choice. Once the land contract agreement is executed, you will issue it to the buyer.

The buyer retains the equitable title to the property throughout the stipulated repayment period. It shows they have the right to eventually acquire the legal title after fulfilling certain conditions. It also gives them a financial interest in the house, meaning if the value appreciates, so does their equity. However, they have no right to sell or transfer the property.

During this period, you can’t sell the house to another party unless the buyer fails to honor their obligation, terminating the land contract. Meanwhile, you will continue paying for the mortgage until your obligation to the mortgage lender is satisfied. Once this is done, they will release their lien on the property, allowing you as the listed owner to transfer ownership.

You can now transfer the legal title to the buyer by transferring and registering its deed in their name. They will then have equitable and legal titles, and the property is theirs to do with as they wish.

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Your Solution to Selling a House With a Mortgage

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