Contract for Deeds: Can You Use If You Have An Existing Mortgage?
Tuesday, June 14, 2011 at 1:21PM Almost all mortgages contain a "due-on-sale" clause that prohibits selling with a contract for deed
June 8, 2011
By: Stephen J. Nash
Nash Law Firm
nash@nash-law.com
Almost all mortgages contain a "due-on-sale" clause that prohibits the seller from selling an interest in the property without paying off the lender or obtaining the lenders approval is unlikely, this clause is the most important consideration for both the seller and buyer before they proceed with a contract for deed.
Do Lenders Really Care If The Property Is Sold On a Contract for Deed?
In the 1980's the real estate market was flooded with contract for deeds. Interest rates were in double digits and contract for deeds provided a cheaper way to buy property. At that time, few mortgages contained a due-on-sale clause. As a result of the explosion of contract for deeds, lender added due-on-sale clauses. By the mid-90's almost all mortgages contained such clauses.
On one level, if the lenders added the due-on-sale clause as a result of the proliferation of contract for deeds, clearly they do care.
But Will Lenders Really Foreclose If They Are Receiving The Monthly Mortgage Payment?
Many argue that lenders won't foreclose because they already have more foreclosures than they can deal with, why would they add more? While this argument sounds logical, that does not mean that they won't. How many times have you seen a lender do something that makes no sense? The fact is, they have the right to treat this as a default and can foreclose. Nobody can promise the homeowner that they will not do so.
But Can't The Homeowner Hide the Contract for Deed From the Lender?
This is difficult if not impossible to do. First, with the advent of computers, information about real estate is easily obtained. Second, even if the contract for deed is not recorded if the buyer homesteads the property, they will show up. Third, if the buyer is added to the insurance, the lender will know. If the buyer is not added to the insurance policy they have no coverage and the seller may lose their coverage. Fourth, who is going to deduct the real estate taxes paid on their income taxes?
The bottom line is that there are many easy to find out that someone else may have an interest in the home, any of which could trigger an inquiry that will expose the contract for deed.
What Should the Real Estate Professional Tell a Seller?
This is clearly a legal issue. As such, you cannot advise them on this issue other than to suggest that they contact a real estate attorney. If you do provide advice, it opens you up ethic and legal claims if things don't turn out well for the homeowner. Not only that but your E&O coverage will not protect you if you were providing legal advice. This is a no win situation for the real estate professional, the best thing you can do is recommend that the seller consult with a knowledgeable real estate attorney who can balance to advantages and disadvantages to going forward with a contract for deed.
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NOTICE The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation. Copyright 2011 Nash Law Firm |