It can be possible to sell your house on a land contract even if you still owe money on it. It's even possible to resell a house on a land contract on another land contract. However, your ability to do it depends on a number of factors, including your lender's willingness to allow it -- and your buyer's willingness to have a lender sandwiched between you both.
You can sell your house on a land contract with an outstanding loan balance if your lender agrees and if the contract doesn't have a due-on-sale clause.
How Land Contracts Work
A land contract, sometimes also called a contract for deed or installment sale, is an agreement between you and the buyer. Under the contract, he agrees to make payments to you, sometimes including a down payment, and you agree to let him use your property while he is paying on it by giving him "equitable title." If he meets his obligations under the contract, you also agree to transfer the "legal title," which is the actual ownership, of the property to him.
The effect of this is that while the buyer, or vendee, gets to use the property as if he had bought it, the property doesn't change hands until the end of the contract. This can help you to defer your capital gains taxes while also potentially giving you the opportunity to keep your mortgage in place.
Buyer Mortgage Issues
When a buyer buys an already-mortgaged home on a land contract, she's taking a big risk. In essence, she's giving you money to build equity in what she thinks of as her home, but if you don't fulfill your obligations to your lender, she could lose her investment when your lender forecloses on you. With this in mind, you can expect a buyer to request information on your mortgage and proof of your payments. She may even request the right to use her contract payment to pay your lender directly if you don't.
Due on Sale Clauses
Although a land contract isn't technically a sale, it's close enough to being a sale that it will trigger the "due on sale" clause in your mortgage. Due on sale clauses say that if you sell your property or an interest in it, the mortgage immediately becomes due and must be paid off in full.
Before attempting to sell your property on a land contract, have an attorney review your mortgage to see if you have a due on sale clause. If you do, you can still sell the property on a land contract, but both you and the buyer should be aware that if the lender finds out and decides to take action, it could call the underlying loan.
Paying Your Mortgage
If you're going to sell your property on a land contract, prepare a plan for how you'll pay your mortgage. This will both make the buyer more comfortable as well as protect your interests. One strategy is to require the buyer's payments to be at least 25 percent higher than your mortgage. Before spending your proceeds from the sale, build up a reserve just in case the buyer defaults. Another good strategy is to hold the down payment in reserve.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.