How Does a Contract for Deed Protect a Buyer if Seller Defaults on the Mortgage?
A contract for deed, or land contract, is often used as an alternative means of financing the purchase price of property. The buyer does not receive an actual deed until payments are made under the terms of the contract for deed agreement. Until the buyer receives a deed, ownership isn't transferred and the property is subject to being foreclosed on if the mortgagee/owner defaults on the mortgage. The responsibility for payment for the property is a separate issue from the ownership of the property.
If there is a mortgage on the property, the contract may violate a due-on-sale clause in the mortgage which the lender may or may not seek to enforce. Most lenders require that the mortgage or deed of trust contain a due on sale clause. This is an acceleration clause in a loan, calling for payment of the entire principal balance in full, triggered by the transfer or sale of a property. Such a clause permits a secured mortgage lender (federal, state or private) to call the entire unpaid loan balance due and payable immediately if the property securing the loan is sold, transferred, traded, gifted or otherwise disposed of without the lender’s prior written consent.
If the owner defaults on the underlying mortgage, the lender may foreclose and the buyer may lose all payments made on the contract. Our Georgia contract for deed form contains a clause requiring the seller to provide evidence of payment of the mortgage on demand by the buyer. The buyer is also allowed to cure the seller's default, be credited for such payments against buyer's obligations, and get reimbursed for the costs of doing so. It is possible to write terms into the contract providing for remedies and damages in the event of the owner's default, such as money damages, a recission of the contract, or other remedy. A contract for deed should be recorded to protect the buyer, because it may be years before the buyer pays off the contract and obtains legal title to the property. Recording either document protects the buyer, but neither passes legal title to the buyer or affects any prior encumbrances.
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