Home Buying in Dewitt>Question Details

Patty, Home Buyer in Dewitt, MI

If you buy a home on a land contract, and seller has a mortgage, what protection do I have if seller is foreclosed?

Asked by Patty, Dewitt, MI Sat Jun 26, 2010

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To be straight and to the point. You would almost zero protection.

Do not buy a home on a land contract, unless the seller owns the property free and clear.

There are many many things that could go wrong. . .

1. The mortgage holder could call the mortgage due (via the due on sale clause)
2. The seller could stop making the payment and lose the home

If you are purchasing a home on a land contract you should number one make sure you have title work done on the property and purchase title insurance so that you can be assured there is no mortgage.

If the property is not owned free & clear, RUN from the deal and find another home.

Land contracts will soon be a thing of the past in MI, anyways. for more info on that you can view the web reference link.
1 vote Thank Flag Link Wed Jun 30, 2010
Very informative!
Flag Wed Jan 15, 2014
I have a question. I have a friend who bought a home on land contract for approximately $78,000 at 8% interest. She paid a down payment of $10,000 toward this land contract. She has been paying on this house for 7 years. Her payment was $775.00 monthly. The seller still has a mortgage on the house through a bank. Through amortization she has always paid $1000.00 monthly. The remaining balance is $47,000.
After the Land Contract was initiated, she filed the contract through the Register of Deeds through the county. She also has been making payments directly to the bank who holds mortgage .

Now, to the issue at hand. My friend recently attempted to secure a loan through the bank that holds the mortgage so she could pay the buyer off. Her goal was to own the home traditionally. She was pre-approved for the loan. She and the banker contacted the owner who lives in another state. A signature was needed from the Seller to finalized the balance with the person who holds the mortgage through the bank. For some reasons unknown, the Seller refuses to sign the necessary documents in order for the buyer to finalize her obligation to pay off this mortgage. Several subsequent attempts have been made to reach the seller and she is not responding. Does my friend have any recourse?
0 votes Thank Flag Link Sat Sep 17, 2016
with a land contract, the owner lied about the property, they value, is 30,000 less then the contract, hot water heater didn't work, front porch flood, back porch is falling off, it was never attach to the trailer, and Its hard to get a loan on a trailer. He's taking my kid to court over none payment, ( none payment was to get property up to standard. He left his trash all over the trailer, Moldy carpet, stove didn't work. frig broken, I put down a deposit of 17,000. on a 5.5 acre with garage and 2 bedroom trailer. He is taking my kid to court next week over none payment.
We have had a appraisal done on the property and it only appraised at . 46, 870. do we have anything to stand on in court over these matters.
He also keep driving by everyday and harassing us.
0 votes Thank Flag Link Thu Aug 13, 2015
You have none! I had this happen to me -I purchased a home with a down payment, made my paymennts on time and one evening a man came and knocked on my door. He was checking occupancy on the house. I said what for and he told me the property had been forclosed on. I had no idea. The next day I found out what was going on, I went to the court dates and I was given 60 days to move out. The bank extended the time for me to be out because of the circumstances, but if they wanted me out right away they could have. I did not recieve any of my downpayments or payments back.
I have since learned some information that will help, when you buy on a landcontract make sure you record the landcontract. This will show you have a vested intrest in the property and they will not be able to take a lein out on the property with out you knowing about it.
Hope this helps
0 votes Thank Flag Link Sun Oct 20, 2013
This is not in your best interest, even if the bank waves the "due on sale" clause. with the current state of the banks, I just wouldn't even go there. There are other ways to aquire the home you want.
I'm downtown Dewitt, If you're looking for a home, give me a call, we'll find a way.
0 votes Thank Flag Link Wed Jun 30, 2010
A "pro" should spell "waive" correctly, in a public forum. js.
Flag Thu Aug 6, 2015
Wow. Lots of questionable advice below.

Derek's correct. It is something you should be asking, and something you should be concerned about. I'm not a lawyer, so this isn't legal advice. For that, you need a lawyer. However . . .

Land contracts, like lease-options, are done all the time when there's an existing mortgage. It's true that a land contract (like a lease-option) represents a transfer of equitable interest and it can, indeed, trigger the due-on-sale clause. That's at the option of the lender. What that means is that if the owner of a property that's secured by a mortgage transfers/sells some/all of the property to someone else, the lender can call the loan immediately due and payable. Even though the property isn't yet transferred in a land contract, there is a transfer of equitable interest. So, IF THE LENDER WANTS, it can call the loan due.

Will they actually do that? Odds are slim, especially in today's economic climate. But they can, and they have in the past.

Now, to address your specific question: What happens if the seller is foreclosed? Quick answer: You lose. The lender comes after the property and seizes the property. Any agreement you may have had with the seller is moot. And anything you've paid him is, essentially, an unsecured loan. You can try to recover your money from him, but the odds aren't good you'll succeed.

The way investors approach it is: If there's any doubt about the economic stability of the seller, or if the investor has to invest any significant amount of money up front, they won't do a land contract or lease-option/lease-purchase. Instead, they'll acquire the property "subject to" the existing mortgage. The seller deeds the property to the purchaser, and the purchaser agrees to keep making the mortgage payments to the bank. That way, the buyer OWNS the property.

If you're considering going into a land contract and you're concerned about that issue, there are a number of ways to deal with that. You can make the payment directly to the mortgage holder. Or you can write the check to the mortgage holder and send it to the seller. That way, he'll know you're paying, and you know that the money you're paying has to go to the mortgage company. Or you can use a land trust, with the money going to the trustee. Or you can use a settlement company to handle the financial end of it.

One other thing: Have the seller sign an "Authorization to Release." That's a form that, after he signs, you send to the lender that permits you to access his records. That way, every month (if you want) you can verify that he's paid and that the loan is current. It won't prevent a foreclosure if he doesn't pay, but at least it'll keep you current on his status.

Again, all this isn't legal advice. For that, you do need a lawyer.

Hope that helps.
0 votes Thank Flag Link Sat Jun 26, 2010
Don Tepper, Real Estate Pro in Burke, VA
Most banks will not waive this clause (and really, would you want them to if it meant the possibility of foreclosure?) - so yes, as Derek has said, you should consult with an attorney because we are not attorneys. This is the only way to properly protect yourself.
0 votes Thank Flag Link Sat Jun 26, 2010

A land contract sale IS deemed a sale, so due on sale clauses must be waived by a bank before a land contract transaction can occur. A land contract sale could trigger a due on sale clause.

See ... two agents with differing opinions. You need consult with a real estate attorney.
0 votes Thank Flag Link Sat Jun 26, 2010
Hi Patty - This isn't something you have to worry about because a property with a mortgage is not eligible for a land contract. Most of today's mortgages have a "due on sale" clause whereby the mortgage is due in full if there is a property transfer. Though the actual transfer of the property is not complete until the end of the land contract term (when the buyer pays the balance in full with cash or their own mortgage), it is treated as a property transfer because the buyer now has a valid interest in the property.

If you have any further questions or concerns about this, please feel free to email me directly nichole@yourhomepros.com, thank you!
Web Reference: http://www.remaxlansing.com
0 votes Thank Flag Link Sat Jun 26, 2010
not true a property with a mortgage is eligible, it depends on the type of loan the seller has. Ive bought 3 houses with mortgages on them in ohio via land contract.
Flag Fri Apr 1, 2016
Good question, Patty, and a very real issue to conercn oneself with.

I will preface that I do not provide legal advice and you must and should receive legal advice only from licensed and qualified legal professionals.

When title to property is involved, recordings are critical. A land contract should be recorded, and even more importantly, you should have proof that the Seller CAN sell the property on a land contract. If the Seller has a mortgage, the buyer SHOULD require proof that the due-on-sale clause is waived and the lender(s) will allow the transaction to occur.

Keep us posted if you are purchasing...

Web Reference: http://DoorToDreams.com
0 votes Thank Flag Link Sat Jun 26, 2010
Can the tenants of a land contract ask for money to move out if they have not made there payments for two months?
Flag Thu Aug 4, 2016
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