Can a Home with an Existing Mortgage Be Sold by Land Contract?

In most traditional real estate sales transactions, the property being offered for sale will have an existing mortgage filed against it to secure the loan made to the Seller. The lender will have made this loan to the Seller when the Seller first purchased the property, usually for a 15- to 30-year period.

It is not unusual for the Seller to want to move or sell the property well before that 15 to 30 year mortgage is paid off in full, too.

So is a new sale of that mortgaged property by Land Contract a viable option?

In a bank-financed sale of a mortgaged property, the Buyer will borrow money from a lender equal to 80% – 90% of the purchase price of the property. The proceeds of that loan will be paid to the Seller (along with funds contributed by the Buyer to meet the purchase price). The Seller will then use that purchase price (or maybe just a portion of that purchase price) to pay off the existing mortgage in full, releasing the mortgage. Then the new lender who lent the money to the Buyer will place its own mortgage on the property equal to the amount that was loaned to the Buyer.

In a self-financed real estate transaction where no new bank loan is involved, the Seller can still enter into a purchase agreement with the Buyer even if the property being sold is encumbered by an existing mortgage held by Seller’s lender. The Seller’s mortgage loan would simply continue to be paid by the Seller using the monthly payments received from the Buyer.

There are some rules of which the Seller should be aware, however.

In many states, the amount of the Seller’s mortgage may not exceed the amount of the purchase price paid by the Buyer for the property.

Further, while the Buyer is making payments, the outstanding amount of the Seller’s mortgage may not exceed the amount that is owed by the Buyer for the property.

Also, the Seller must be sure that entering into a land contract form of agreement will not cause the Seller’s mortgage to become in default, since many mortgages prohibit the transfer of any interest in the property. This can only be determined by a careful reading the existing mortgage contract.

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