The following is an overview of the process that a Buyer and Seller can expect when they undertake a real estate sale using a Seller-Financed Mortgage Contract:
The Seller offers his or her property for sale, setting forth the proposed terms of the sale. The Buyer can agree to the terms proposed by the Seller, or propose modifications to those terms through a counter-offer.
Once the Seller and Buyer reach an initial agreement on the terms, a real estate purchase agreement, a mortgage contract and a Deed are drafted (usually by the Seller) and both parties sign the documents.
The mortgage, which acts as a lien on the property, ensures the payment of the purchase price owed by the Buyer. The mortgage stipulates that the property is collateral for the repayment of the amount that is due. The mortgage is filed by the Seller with the recorder’s office in the county in which the property is located. This mortgage is filed at the same time as the Deed is filed, or very shortly thereafter. If the Buyer fails to make the payments required by the agreement, the Buyer is in default and the Seller can foreclosure on the mortgage.
The Deed, which transfers ownership of the property, is signed by the Seller and given to the Buyer. The Deed is then filed on behalf of the Buyer with the recorder’s office in the county in which the property is located.
Once the Deed is filed, the title or ownership of the property transfers to the Buyer immediately. This makes a Seller-Financed Mortgage Contract sale different from a Land Contract sale, where the Seller retains title until the Buyer pays the entire purchase price. The mortgage that the Seller files encumbers the property; in essence, the property becomes collateral for repayment.
Once the mortgage and Deed are filed, the Buyer ‘owns’ the property in the exact same manner in which a bank-financed home is owned by the Buyer, with encumbrances. That means the Buyer is solely responsible for the payment of all property taxes, insurance, repairs, upgrades, maintenance, etc. that comes with home ownership.
Should the Buyer not make payments as set forth in the real estate purchase agreement, then the Buyer is in default. Upon such default, the Seller has the right to file a foreclosure action seeking the sale of the property purchased by the Buyer. Through this foreclosure sale, the property will be sold at auction and the proceeds of the sale (after certain court costs, costs of the sale, taxes and other fees are paid) are paid to the Seller, up to the balance of the unpaid purchase price for the property owed by the Buyer. If the amount of the sale is less than the balance owed to the Seller under the real estate purchase agreement, the Seller has the right to bring a lawsuit against the Buyer and obtain a judgment for the difference (which is known as the deficiency balance).
In most cases and for most USA states, a Seller-Financed Mortgage Contract best serves the interests of both Buyer and Seller over a Land Contract, a Lease-to-Own Contract, or any type of Corporate Contract arrangement.