Can You Use a Contract for Deed with Existing Mortgage Debt?

Can You Use a Contract for Deed with Existing Mortgage Debt?

Buying or selling a home through a contract for deed can be a helpful option when traditional financing is out of reach. But what happens if the seller still owes money on their mortgage? This is a common question, especially in today’s market where many homeowners still carry debt on their property.

The short answer is yes, you can use a contract for deed with existing mortgage debt. However, it comes with some important risks and legal details that both buyers and sellers need to understand. In this article, we will explain how this process works, the risks involved, and how to protect yourself if you decide to go forward.

What Is a Contract for Deed with Existing Mortgage?

A contract for deed with existing mortgage is when a seller agrees to sell a property through a contract for deed, even though they are still paying off a mortgage on it. The buyer and seller agree on terms such as the purchase price, down payment, and monthly payments. The buyer makes payments directly to the seller. In return, the buyer can move into the home and eventually gain ownership once the full amount is paid.

However, the legal title remains with the seller until the contract is paid in full. During that time, the seller must continue making payments to their mortgage lender. If the seller stops paying the lender, the property could go into foreclosure—even if the buyer is making all their payments on time.

This is why a contract for deed with existing mortgage needs to be handled carefully.

Is It Legal to Use a Contract for Deed with Existing Mortgage Debt?

Technically, yes. But there is one big concern called the due-on-sale clause. This clause is common in many mortgage agreements. It gives the lender the right to demand full repayment of the loan if the property is sold or transferred without their permission.

Since a contract for deed in Minnesota does not immediately transfer the title, some sellers assume the due-on-sale clause will not be triggered. However, this is not guaranteed. If the lender finds out, they could still decide to call the loan due. That could put both the buyer and seller in a tough spot.

Because of this risk, it is very important to review the seller’s mortgage terms before creating a contract for deed.

Risks of a Contract for Deed with Existing Mortgage

Using a contract for deed with existing mortgage comes with several risks, especially for the buyer.

First, there is the chance of foreclosure. If the seller stops paying their mortgage, the bank can take back the property. The buyer could lose the home and any money they have already paid.

Second, the buyer has fewer legal protections. Traditional mortgages go through a long foreclosure process, giving borrowers time to catch up on payments. With a contract for deed, the seller may be able to cancel the agreement quickly if the buyer misses payments.

Third, the seller may have financial problems the buyer is not aware of. If the seller is behind on taxes or if the property has liens, those issues can affect the buyer later.

Lastly, if the contract is not recorded with the county, the buyer could have a hard time proving their ownership rights.

How to Protect Yourself in a Contract for Deed with Existing Mortgage

There are ways to reduce the risks and make the process safer for everyone.

Buyers should ask the seller to show proof that they are current on their mortgage. It is also smart to use an escrow account. That way, the buyer pays into escrow and the escrow company makes sure the mortgage gets paid on time.

Recording the contract with the county recorder’s office is another key step. In Minnesota, this helps protect the buyer’s interest in the property. Recording your contract for deed in Minnesota makes the agreement official and shows the world that you have a financial interest in the home.

Both sides should also work with a real estate attorney to review the contract and explain the risks. Clear communication and legal protection make a big difference in how safe and successful the agreement will be.

Alternatives to a Contract for Deed with Existing Mortgage

If the risks feel too high, there are other options to explore.

Some sellers may offer a lease-to-own agreement instead. This lets the buyer rent the home with the option to buy it later. Others may consider a wraparound mortgage, where the seller wraps their mortgage into a new loan with the buyer.

In some cases, it might be best to wait until the mortgage is paid down or refinanced before moving forward with a sale.

Should You Enter a Contract for Deed with Existing Mortgage Debt?

Yes, it is possible to use a contract for deed with existing mortgage, but it must be done with care. Buyers need to understand the risks and protect themselves with a solid contract and good legal advice. Sellers need to be honest about their mortgage and follow the terms of their loan to avoid problems.

If both sides communicate well, take legal steps, and plan ahead, a contract for deed can still be a path to homeownership even when a mortgage is involved.