Doing a contract on a house with a balloon payment

Full Question:

My mom currently has a home with a mortgage on it, which I am paying for out of my money. Since I can't deduct these payments, and all the repairs I've done to her property, what can I do to buy the property? We were going to do a 7 year land contract with a balloon payment? Is this a good idea??
03/12/2009   |   Category: Real Property ยป Sales   |   State: ALL   |   #15591

Answer:

I am prohibited from giving legal advice. The answer will depend on all the facts and circumstances involved. There are important tax considerations to be considered. The mortgage may have an acceleration clause which will be triggered by a transfer. Please read the articles below to determine the applicability to your circumstances.

A balloon payment allows the buyer to pay off or refinance the loan early and minimize the financial burden on the seller. Such balloon payment arrangements carry a degree of risk. Both the buyer and the seller are depending on the buyers ability to finance the balloon payment through a financial institution at the time of the land contract's maturity. If this isn't possible, the seller must foreclose on the contract or wait longer for a payment.

Insurance in a contract for deed situation may be complicated. A typical mortgage requires the owner to purchase a home owners' insurance policy in the event of catastrophe. In a land contract, the insurance should be the burden of the buyer; however, in instances where the contractor is carrying the mortgage, insurance will be in the name of whoever carries
the loan. Sellers should talk to their mortgage company about having the insurance policy in the name of the buyer.

Property taxes are another issue. Some sellers will seek to have the taxes added into the monthly payment. Others will simply invoice the year's tax bill when it comes time, and request that amount from the buyer. The seller and the buyer should come to a mutual agreement as how the taxes will be handled during the term of the contract.

One of the disadvantages of a land contract for buyers is the process of foreclosure. The process is considerably longer when dealing with a financial institution. By contrast, repossession by a land contract vendor can happen quickly. Furthermore, money invested by the buyer will be forfeited upon termination of the contract.

This may seem like an unfair advantage for sellers until one considers the effects of depreciation and "due-on-sale" clauses. Since buyers are allowed to use the property as if the title were theirs, the results of a foreclosure could potentially leave a seller with land that is worth less than what they've earned through land contract payments.

Land contracts may also violate the due-on-sale clause present in many mortgages. A land contracts may violate this clause and give lenders the option to call in the loan on the title holder. Even a long-term lease can trigger the due-on-sale clause, leaving the seller with a
potentially significant financial burden in the event of a contract violation.