Mortgage Lending: 5.4.3.7 Balloon Payments
Many states place limitations on balloon payments in contracts for high-cost loans.
Many states place limitations on balloon payments in contracts for high-cost loans.
Most high-cost loan statutes contain provisions regarding loan counseling.
Depending on the state, other high-cost loan terms may be prohibited or substantially limited by statute. For example, most laws place some kind of limitation on mandatory arbitration clauses in high-cost loans.
Some states also include other prohibitions.
Some state high-cost loan laws provide their own remedies. Other states incorporate their existing usury remedies for violations of state high-cost loan statutes.
Most commonly, buyers arrange for third-party financing to purchase a home. But when this proves difficult, buyers may be drawn into a seller-financed transaction, whether as a land installment contract or a seller-financed mortgage. Land installment contracts have been described as the “poor man’s mortgage.”57
Under the doctrine of equitable conversion, the buyer is treated as the owner of the property and, as such, bears the risk of loss, unless the contract states otherwise.78 The Uniform Vendor and Purchaser Risk Act provides, however, that the seller retains the risk of loss until the buyer takes possession or title has passed.79 Only thirteen states have adopted this Act, but practitioners should check the law of their state.80 Some courts hol
The seller may transfer legal title of the property to a third party during the term of the land installment contract. As discussed in § 11.4.2, supra, the third party will take title subject to the buyer’s contract if they have notice of its existence.
The buyer is generally free to transfer their rights under an installment land contract without the prior consent of the seller, unless the contract states otherwise.119 Although some courts will give effect to a contract clause forbidding assignment, the seller’s acceptance of payments from the assignee may operate as a waiver of the prohibition.120
When the buyer has performed all obligations under the land installment contract and the seller fails or refuses to convey legal title, the buyer may sue for specific performance. To prevail in such a case the buyer must show the existence of the contract, performance on the buyer’s part, and the seller’s non-performance.126 Alternatively, the buyer can sue for contract damages or to rescind the contract and seek a return to the position they were in before the contract.
Some of the circumstances in which courts have upheld fraud claims involving land installment contracts include affirmative material misrepresentations about the following:
The law implies a covenant of good faith and fair dealing in every contract, including a land installment contract.136 Both buyers and sellers may breach this covenant.137 A breach of this covenant will not trigger punitive damages, absent breach of a special relationship, because the cause of action sounds in contract, not tort.138
If a buyer defaults on a land installment contract, the seller has a variety of remedies available.
If the borrower fails to perform any of the covenants under the contract—such as maintaining insurance on the property, avoiding waste, or failing to make the installment payments promptly—the seller may sue for breach of contract. There are two standard contract remedies: money damages and specific performance.
Some general state residential property disclosure laws specifically include land installment contracts in their definitions or otherwise make specific reference to such contracts.158 In addition, a number of state statutes dealing exclusively with land installment sale contracts contain disclosure requirements. This section describes these statutes, which have been enacted in California, the District of Columbia, Illinois, Indiana, Iowa, Maine, Maryland, Minnesota, Nevada, North Carolina, Ohio, and Texas.
The Uniform Consumer Credit Code (UCCC) includes limitations on finance charges, late fees, attorney fees, and other terms.179 It defines “consumer credit sale” to include the sale of an interest in land that is payable in installments or is subject to a finance charge.180 Twelve states have adopted some form of the UCCC: Colorado, Idaho, Indiana, Iowa, Kansas, Maine, Oklahoma, South Carolina, Utah, West Virginia, Wisconsin, and Wyoming.
Separate from the UCCC, some state laws specifically cap the interest rate that sellers can impose on buyers in installment land contracts.
Practitioners report that a common problem with land installment contracts is a failure to clearly denote who is responsible for the payment of property taxes during the contract term.
A common problem with land installment contracts is that the contract often provides that the buyer has the obligation to make repairs, or even to bring the home up to habitable condition. However, a buyer who expends significant funds on repairs may never obtain a deed to the home, and may lose a significant investment.
A Minnesota provision mandates that covered sellers give buyers a notice recommending that the buyer purchase title insurance or ask a real estate lawyer for a “title opinion,” and check with a title company or the county where the property is located to find out if there is a mortgage or other lien on the property.240
The general rule is that both sellers and buyers have a recognizable interest in the title to the property, which may be encumbered. Some state statutes expressly address this question.
North Carolina, Ohio, Pennsylvania, and Texas explicitly require that the seller in a land installment contract possess title to the property being conveyed under a land installment contract.256 Oregon provides special protections for homeowners who buy under an installment contract from a subdivision developer, including mandating the use of an escrow agent for the title.257
In Michigan, if the buyer mortgages an interest in the land installment contract, the seller must extend certain rights under the contract to the buyer’s mortgagee.268 South Dakota provides that a buyer’s interest in the real property during the term of the contract is an interest that the buyer may mortgage and to which a judgment lien can attach by operation of law.269
Oklahoma and Florida both provide by statute that land installment contracts shall be deemed mortgages, and “shall be subject to the same rules of foreclosure and to the same regulations, restraints and forms as are prescribed in relation to mortgages.”270