By Attorney Jacquelyn M. Yeakle
It is common for homebuyers to obtain financing from traditional banks when purchasing a new home, but other financing options may be available. There are two less common financing options to consider when purchasing a home: seller financing and installment land contracts.
Seller financing is when the seller offers financing to the buyer for the sale of the home instead of the buyer obtaining financing from a traditional bank. This option is typically used when the seller has an established relationship with the buyer, such as a parent and child, or if the buyer cannot obtain financing from a traditional bank. Similar to a traditional bank loan, a settlement will occur where the buyer signs a note and mortgage, the mortgage gets recorded, and the buyer thereafter makes monthly payments of interest and principal to the seller. The buyer will take legal and equitable title to the property on the date of settlement. For seller financing to be a viable option, the seller cannot have a mortgage, or the mortgage must be paid off on the date of settlement. The seller’s role in a seller financing purchase is akin to the traditional bank’s role in a traditional bank loan purchase.
An installment land contract transaction is when the buyer and seller enter into an agreement whereby the buyer makes monthly payments of interest and principal to the seller, but the buyer does not take title to the property until the buyer has made the final payment. Similar to seller financing, this option is typically used when the seller has an established relationship with the buyer or if the buyer cannot obtain financing from a traditional bank. There is an initial settlement where the parties sign the installment land contract, the buyer pays a down payment, and taxes, sewer, etc., are prorated if the parties agree the buyer will be responsible for such payments. The final settlement is then held where the buyer makes the last payment and the title is transferred from the seller to the buyer. It is important to note the Pennsylvania Installment Land Contract Law governs this type of transaction and certain language must be included in all installment land contracts in Pennsylvania.
For both seller financing and installment land contract transactions, other laws may govern, such as the Pennsylvania Loan Interest and Protection Law and the Federal Regulation X of Real Estate Settlement Procedures Act of 1974. As a result, it is recommended to consult an attorney to prepare the documents for either transaction to ensure the parties are complying with all applicable laws. If you have any questions on seller financing or installment land contracts, the attorneys at Walters & Galloway, PLLC are happy to assist!
