Three years ago you bought a rental from a retiring landlord on a land contract. Purchase price 118,000 dollars, 12,000 dollars down, seller carried the rest at 6 percent with a balloon at year five. You have paid him 638 dollars a month, on time, thirty-six times. The house rents for 1,275 dollars. The balloon comes due in twenty-two months and you need to be out of this thing with a real loan before it does.
You call a lender and the first question is not about the rent. It is whether the deed is in your name. And on most land contracts, it is not.
We are a Pittsburgh-based mortgage brokerage, NMLS #1840537, and we place rental and fix and flip loans for real estate investors across Pennsylvania and additional states. Seller-financed acquisitions are one of the most common ways investors build a first few doors, and refinancing out of them is one of the most common places those investors get stuck. Here is what a lender is actually looking at, how the paperwork differs across the three structures, and what to do now if your balloon is inside two years.
Three structures, and only one of them is simple
These get used interchangeably in conversation and they are not the same thing.
A note and mortgage. The seller deeds you the property at closing and takes back a recorded mortgage or deed of trust as security. You hold legal title from day one. This is the cleanest version and it refinances almost exactly like a conventional payoff.
A land contract, also called a contract for deed or an installment land contract. You take possession and pay over time, but the seller keeps legal title until you have paid in full. You hold what the law calls equitable title. This is the structure that creates the refinance problem, and it is by far the most common seller-financing form on small rentals.
A lease option or lease purchase. You are a tenant with a right to buy at a set price. You do not own the property in any sense and part of your rent may be credited toward a future purchase. This is the weakest position of the three and it refinances as a purchase, not a refinance, which changes your leverage and your cash requirement.
Figure out which one you actually have before anything else. Read the recorded document, not the name on the top of the paper. We have seen agreements titled Land Contract that were structured as notes and mortgages, and agreements titled Purchase Agreement that were installment contracts.
Why equitable title stops a normal refinance
A lender making a loan secured by real property needs to take a lien on the fee. If the seller still holds legal title, you have nothing for the lender to attach to. There is no vesting deed in your name for the title company to insure from.
The mechanical fix is straightforward and happens at your closing table. The seller delivers a deed into you, the title company records it, the payoff to the seller funds from your new loan proceeds, and the lender’s mortgage records immediately behind the deed. Deed in, mortgage in, seller paid, all in the same transaction. Title companies do this constantly.
The underwriting fix is the harder part, because the question becomes: is this a refinance or is this a purchase?
The seasoning question, which decides your leverage
This is where the money is. If the transaction is treated as a refinance, you are borrowing against current appraised value. If it is treated as a purchase, you are typically constrained by the lesser of appraised value and the contract price, and you will need purchase-level cash.
On the house above, that difference is large. Contract price was 118,000 dollars. Three years of a hot market and a new roof later, it appraises at 172,000 dollars. Your payoff to the seller, after thirty-six payments of principal, is around 96,000 dollars.
As a rate and term refinance at 75 percent of appraised value, you can borrow up to 129,000 dollars. Payoff is 96,000 dollars, closing costs call it 5,000 dollars, and you walk out with roughly 28,000 dollars back in your pocket, though pulling that cash makes it a cash-out and the leverage limit usually drops. At 70 percent cash-out leverage you can borrow 120,400 dollars, still 19,400 dollars above the payoff and costs.
Treated as a purchase at 118,000 dollars, you would be limited by that price and the 54,000 dollars of appreciation would be invisible.
What decides it is documented occupancy and payment history under the contract. Most programs that treat a land contract payoff as a refinance want to see a recorded contract and a payment history of some minimum length, twelve months being common. Requirements vary by lender and program and are subject to change, but the pattern is consistent: recorded plus seasoned equals refinance, unrecorded plus unseasoned equals purchase. Our post on cash-out refinance seasoning covers how that clock runs on ordinary rentals.
Was the contract recorded
This is the single fact that most often decides whether the file works, and most investors do not know the answer.
A recorded land contract, or a recorded memorandum of it, puts the world on notice that you have an interest in the property. It creates a documented start date. It protects you from the seller mortgaging the property out from under you or a judgment attaching to his interest and landing on your house.
An unrecorded contract gives you almost none of that. Three years of cancelled checks are evidence of something, but there is no public record connecting you to the property, and a title search will not show your interest at all. Underwriting will usually treat the transaction as a purchase, and worse, the title search may turn up liens that attached to the seller during the three years you were paying. Those are now your problem to clear before closing. Our post on clearing an old unreleased mortgage or judgment walks through how those get resolved.
If your contract is unrecorded and your balloon is more than a few months out, record a memorandum now. It costs very little and it starts a clock you will want to have started.
The math on the refinance itself
Take the same house at 172,000 dollars appraised, renting for 1,275 dollars.
Refinance 120,400 dollars at 70 percent leverage. At 7.5 percent over thirty years, principal and interest is roughly 842 dollars. Taxes are 178 dollars a month, insurance 92 dollars. Total debt service is 1,112 dollars.
Coverage ratio is 1,275 divided by 1,112, which is 1.15. That is thin. It clears programs with a 1.10 or 1.00 floor and fails anything looking for 1.20.
Drop to the rate and term amount of 96,000 dollars plus costs, call it 101,000 dollars. Principal and interest is roughly 706 dollars, plus the same 270 dollars of taxes and insurance, for 976 dollars. Ratio is 1.31. Comfortable.
That is the real tradeoff in a seller-financed payoff. You have equity, and the ratio decides how much of it you can actually take out, not the leverage cap. Most investors in this position discover that the binding constraint is coverage, not loan-to-value. Model both versions in the DSCR deal calculator before you decide how much to pull.
What to gather before you apply
The recorded contract or the memorandum, with the recording stamp. The full executed agreement including any amendments. Thirty-six months, or however many you have, of proof of payment, ideally bank statements or cancelled checks rather than a handwritten ledger. A payoff statement from the seller with a per diem. Proof you have been paying the taxes and insurance, because in most land contracts that obligation sits with the buyer and lenders check it. The current lease and proof of rent collection.
Two items that get overlooked. First, if you have been carrying the insurance, confirm the policy names the correct insured, because on a land contract the named insured is frequently still the seller and that will surface at closing. Second, if the property is held or intended to be held in an entity, the deed should come in to the correct vesting, which our post on title vesting, LLC versus personal name covers.
When the seller will not cooperate
It happens. The seller likes the income stream, or he has died and his estate is slow, or he simply does not answer.
Your leverage is the contract itself. A land contract with a balloon obligates you to pay and obligates him to deliver a deed on payment. If he refuses, that is a specific performance question for a lawyer, and it is slow. If the seller has died, the deed has to come from the estate, which adds probate timing you do not control.
One workaround worth knowing: if the property needs work before it will appraise or before a rental lender will take it, a short-term rehab loan can pay off the seller now and buy you the time to stabilize. If you go that route, pay attention to how the interest is charged, because on a partially drawn rehab facility the difference between Dutch and non-Dutch interest is real money over a six month hold.
This is the argument for starting twelve months before your balloon rather than sixty days before it. A land contract payoff has more moving parts than a normal refinance, and every one of them depends on a counterparty who has no deadline pressure of his own.
The short version
Find out which structure you actually have. Confirm whether it is recorded. Build a clean payment history file. Start at least six months, preferably twelve, before the balloon. Expect the coverage ratio, not the equity, to set how much you can borrow.
If you are sitting on a land contract with a balloon coming and want to know now whether it will refinance and at what number, reach out or call 412-990-2941. Send the recorded contract and twelve months of payment proof and we will tell you where it lands. The DSCR rental loan page covers the product this usually pays off into.
FMC Capital is a mortgage brokerage, NMLS #1840537. Loan terms, rates, leverage, seasoning requirements, and program guidelines vary by lender, property, borrower, and jurisdiction, and are subject to change. Land contract and installment sale law differs materially by state. Nothing here is legal advice, tax advice, or a commitment to lend. Consult your own attorney on the contract itself.