I am not an attorney and I don't even play one on TV, however, I have concerns that there are people doing things that can get them in trouble. Not only will it get them in trouble, but it could have detrimental effects on other people too. This is the sale of a home on an owner carried contract when there is a mortgage on the property. My concern is twofold, first has to do with the legality of doing it in the first place. My second has to do with protection for both the buyer and the seller. I am hearing of this happening with people that owe more than they can sell their house for currently on the seller side, and buyer's that can't qualify (for whatever reason) or think they can't qualify for a loan on the buyer side.
First, the legality:
Standard Trust Deeds in Oregon have the following wording, "18. Transfer of the Property or a Beneficial Interest in Borrower. As used in this Section 18, "Interest in the Property" means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent of which is to transfer of title by Borrower at a future date to a purchaser.
"If all or any part of the Property or any Interest in the Property is sold or transferred (or ... is sold or transferred) without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument...."
This is what is known as a "due on sale" clause. What it means is that if you sell your home, even on an owner carried contract, the underlying loan is due and payable and the lender can demand full payment. In the case of an owner carry contract where the purchaser has paid a deposit of $10,000 and the lender calls the note due and the $10,000 is already spent, it looks like everyone is going to be a loser, doesn't it?
Let's take a fictitious example. Let's say I am selling you my home for $200,000 and in today's market it is worth $200,000 and I owe $200,000 but I can't afford to sell it on the market because of the commissions and closing costs. We enter into a contract where you give me $10,000 up front and make payments every month that doesn't quite cover what my payment is. After 6 months of paying each month, I decide I can't afford to put out the additional money each month. What are your options? At the same time, after 6 months, you decide to quit making your payments, what are my options? Think about what happens if I owe more than I am selling it to you for. What are the possible ramifications?
There are numerable scenarios where this can go wrong and only one where it can go right. If you are holding a contract for sale on your home, are you aware of how long it takes to get possession of the home if I stop making my payments? If you are buying my home, and I stop making the underlying payments, what can you do about it?
Don't be taken advantage of on either side of the equation. There is another way to do this that doesn't bring in the "due on sale" clause and that is a lease purchase agreement. There are also hazards with this a lot like the protection issues above. I just want to make everyone aware of the difficulties of selling a home when not using traditional means. A lease option may be the ideal way to go about handling your problem, however I strongly suggest you don't go with an owner carry contract if you have underlying financing on a standard trust deed. First time home buyers should be aware that they can be taken advantage of in this type of scenario. The first thing you should do as a first time home buyer, is find out what you can qualify for and if you actually will qualify for a loan. That is where you need to contact a mortgage professional like me. You can always reach me through either my office, 541-342-7576 or my e-mail firstname.lastname@example.org.