Land Contracts: Seller Financing or Seller Entrapment?

Sometimes one who wants to buy real property cannot get financing from a bank or mortgage company. And the seller figures it can finance the deal for the buyer in order to get a sale and earn some interest too. In Michigan seller financing often is by a land contract but could instead be by the seller deeding the property to the buyer and taking back a mortgage from the buyer.

Now the federal and state governments have new, complicated rules. Fortunately, the new rules do not affect homeowners willing to sell their home on land contract. For others, rules restrict having the full balance come due (balloon payments) and require the seller to make some evaluation of the buyer’s ability to pay the monthly payment. (Not explained is how a seller could make that determination when those who make mortgage loans for a business will not lend to the buyer.) Most sellers can make up to 3 land contracts a year but builders are limited to 1. A seller who makes more than the allowed number of seller-financed sales in a year must be licensed as a mortgage originator.

The risk of prosecution for a violation may be minimal–it is too early to say. The bigger risk may be that a court rules that a buyer can rescind a land contract entered into in violation of these laws and force the seller to refund the money paid in return for getting the property back. For many sellers, such an order would be a huge blow.

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