A home seller may offer an owner-financed, or seller-financed mortgage if he has had difficulty selling a home using more conventional means, which can be the case with specialty properties or with a buyer who is having problems obtaining financing. The contract between the buyer and seller outlines all of the agreements between the two parties. While everything may seem to go smoothly throughout the payment process, this can change if the seller dies before the loan is paid.
If the buyer executed a mortgage note to purchase the home, the house is titled in the buyer's name. While the borrower is usually prohibited from assigning his obligations without permission, these restrictions generally do not exist for the buyer. Unless the mortgage had a clause stating exactly what happened upon the death of the seller, the mortgage loan would be transferred to the seller's estate, and the buyer would make his payments to the representative until the probate process determined who owned the mortgage.
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Rent to Own
A rent-to-own arrangement is not as solid. Obligations under a contract outlining the rent-to-own arrangement should still transfer to the seller's heirs. However, a more informal agreement could cause problems. With a rent to own, the home is still titled in the seller's name. If the buyer cannot prove that he has a rent-to-own agreement, the title of the house may transfer to the seller's estate and be distributed to the sellers heirs. The buyer would be a renter in this case and subject to eviction with notice according to the state laws, losing any money that he has paid.
Specific Contract Language
If a buyer is entering into a seller-financed mortgage, he needs to ensure that the contract, whatever form the purchase takes, has certain language to protect him in case the seller dies. The mortgage note or rent-to-own agreement should state specifically that the contract is binding on the seller's successors and assignees unless the seller wishes to make the mortgage note void upon his death. If this is the case, the buyer would not have to pay the mortgage after the death of the seller.
Preferred Seller Financing Methods
A seller-financed property where title is transferred to the buyer and the seller holds an official mortgage note securing the loan is the best arrangement to safeguard the buyer's best interests. A seller can also sell the mortgage for an upfront cash payment in this case as well. Contract-for-deed or rent-to-own arrangements present the greatest risk to the buyer and should be reviewed carefully by a lawyer to be certain that everyone is protected in case the seller dies.