Land Contracts vs. Traditional Mortgages: How to Refinance a Borrower Off a Contract for Deed

A land contract, also called a contract for deed or installment sale agreement, is a seller-financed purchase where the buyer makes payments directly to the seller but does not receive legal title until the contract is paid in full. These arrangements are common in rural markets, among investors, and in transactions where buyers cannot qualify for conventional financing. MLOs encounter them most often when a buyer wants to refinance out of the arrangement and into a traditional mortgage.

How Title Works Under a Land Contract

Under a land contract, the seller retains legal title (also called the vendor's interest) while the buyer holds equitable title. The buyer occupies the property and builds equity through payments, but cannot sell or mortgage the property in the traditional sense until they receive the deed. Defaults under a land contract typically give the seller the right to forfeit the contract and reclaim the property without a formal foreclosure in many states, which is a significant risk distinction from a mortgage.

Refinancing Off a Land Contract

• ✦Fannie Mae requires that the borrower has been making on-time payments for at least 12 months prior to refinancing
• ✦The subject property must be titled in the borrower's name, meaning the seller must deed the property to the buyer at or before closing
• ✦The payoff of the land contract is the amount outstanding under the agreement, which the refinance proceeds satisfy
• ✦Fannie Mae treats a land contract refinance as a rate-term refinance if no cash is extracted beyond closing costs

Documentation Requirements

The underwriter will require a copy of the land contract itself, 12 months of cancelled checks or bank statements showing payment history, and evidence that the payoff amount matches the outstanding balance under the contract. If there is no appraisal history, the current appraisal establishes value. Title must be cleared and the seller must cooperate to execute a deed -- if the seller is unwilling or unable to transfer title, the refinance cannot close.